Are you considering hiring a contractor for a big construction project? You may want to consider asking about surety bonds when you interview the contractors. These bonds provide assurance that the project contractor will complete the job in accordance with the terms of the contract. There are generally three parties involved in a bond. These are you, the owner; the contractor and the surety company. The surety company is guaranteeing to you, the owner that they will ensure the project is completed should the contractor default. The bond’s face amount will normally equal the amount of the contract.
Should the surety company need to act on the bond, they will typically have a few different options for remedies. The company could hire another contractor and have them complete the project. They could work with the current contractor and help keep him from defaulting. This usually involves loaning money to the contractor so they can finish the project. The surety company could also just reimburse the owner for the cost of the bond.
Surety differs from insurance. The primary difference is the contractor’s guarantee to the surety company that they will complete the project in accordance with the terms of the contract. With insurance, the property owner may be reimbursed for costs from a lost project, but the insurance company usually can’t recoup the insurance payment from the contractor.
Potential losses are also estimated differently under traditional insurance. A surety company will expect to suffer no losses and will work with the contractor to ensure this happens.The surety fees are paid by the contractor to provide the guarantee to the owner that their project will be completed correctly.
The contractor is required to provide the surety company an indemnification agreement which guarantees they will be repaid should they have to honor the bond.
Another difference between surety and insurance is that a bond is created based on the requirements of the owner. Insurance policies are typically created by the insurance company and leave little room for owner modifications.
This type of bond is usually required on public projects. It must usually be part of the bid package. Knowing a contractor has a surety bond provides the owner guarantees if the project isn’t completed by the contractor. The contractor’s bond tells the owner that the surety company has evaluated the contractor’s business and believes they are capable of performing the work.
It is important to understand that not every contractor will get a surety bond. This is a process based mostly on the financial strength of the contractor and their company. If a contractor doesn’t have the credit, they won’t be approved for a bond. Requiring a surety bond allows the owner to pre-qualify potential contractors and reject any who aren’t capable of completing the project.
Companies that issue surety bonds will normally use a licensed broker to find contractors. The company will take a look at the contractor’s books and determine if their company is financially stable enough to complete a particular project. For more on the use of these bonds in the construction industry www.hcgms.org has a very good article.