What You Should Know

• A surety bond is a three-party agreement where the surety guarantees the principal (contractor) will fulfill the contract to the obligee (owner).
  
  
• There are 3 primary types of contract surety bonds. First is the bid bond, which assures the contractor will enter into contract at the price bid and provide the required payment and performance bonds. The payment bond guarantees the contractor will pay all suppliers, subcontractors, and laborers work completed on the project. The performance bond guarantees the contractor will perform the contract according to its terms and conditions.
  
  
• The surety company uses its financial resources to provide assurance to the obligee that the contractor will fulfill the obligations in the contract.
  
  
• The surety company charges a fee, known as the bond premium, for underwriting or pre-qualifying the contractor.
  
  
• The surety company completes an extensive prequalification process of the contractor to assure that they are satisfied the contractor has the character, capacity, and capital available to fulfill the contract.
  
  
• In the event of contractor default, the surety will conduct investigation into information provided by all parties involved before taking action. The options of the surety may include financing the original contractor or providing support to finish the project, arrange for a new contractor to complete the project, assume the role of contractor and subcontract out work to be completed, or pay the penal sum of the bond.
  
  

Functions of Surety

• Assure project completion
• Assure a qualified contractor on the project
• Guarantee laborers, suppliers, & subcontractors will be paid
• Reduce owner from the risk of a lien being placed on the project from unpaid suppliers, subcontractors, etc.
• Promotes contractor growth by increasing opportunities & providing advice
• May lower the cost of construction projects through the competitive bid process
• Ability to screen out contractors who are unqualified

Why Contractors Fail

Construction is a risky business and surety bonds provide security and assurance to owners that the contractors are capable of completing the work and paying subcontractors, laborers, and suppliers. The goal of surety companies is to minimize risk; therefore, they are knowledgeable about events or signs which could lead to contractor failure. Below are some of the top causes of contractor failure.

• Over expansion or change in scope of business
• Inexperience with new types of work or inadequate training/experience of personnel
• Changes in ownership or key personnel within the company
• Financial management problems caused by improper accounting practices, inadequate costs and management systems, and estimating problems
• Economic instability due to sudden changes in the market
• Weather delays or poor site conditions
• Material, equipment, or skilled labor shortages
• Contract terms which may be time consuming and burdensome