What contractors need to know about surety Bonds

1. What contractors need to know about surety Bonds There’s a term that is frequently used in surety bonds - Suretyship. Every contractor should have complete knowledge about surety bonds and this term in particular. The basic definition of Suretyship is:

2. it is form of credit that is wrapped in the financial guarantee. It is not similar to Insurance that is why it is termed as surety bond. In surety bond there are three different kinds of parties.

3. Principal: Principal is the contractor who undertakes the obligation under the bond. • Obligee: Obligee is the one who receives the benefits of Surety bond i.e. the owner. • Surety: These are the ones who issue and assure that the bond will perform well.

4. Difference between Insurance and Surety Bonds • The main difference between insurance and surety bonds is the number of parties involved. Like we discussed above in Surety bond three people get involved: Principal, Obligee and Surety. While in insurance involvement is between two people: insurer is the one who provides policy and the insured is the one who is protected by the policy.

5. In insurance the premium is required to be paid on a monthly or quarterly basis according to the opted plan. While in case of Surety bond firstly there is no premium which means what we pay is for guarantee purpose that shows the principal flow in accordance to obligation and mostly needs to pay once a year. • There is higher risk of loss in insurance and because of this the insurance rates are managed accordingly, so that they can cover the loss. On the other hand in surety bonds there is minimal chance of loss. If so ever the loss occurs then it will be paid by the principal as soon as possible.

6. Type of Contract Surety Bonds • Contract Surety bonds are mainly classified into four main types. • Bid bond • Performance bond • Payment bond • Maintenance Bond

7. Bid bond: This type of bond assures the project owner that the contractor has all the ability to complete the project under the described outlines. In this type of bond a contractor can’t back off once he has won the bid. Bid bond is basically used in commercial, federal and sometimes in private residential projects. • Performance bond: This type of surety bond protects the project owner when the contractor fails to complete the project as committed. In this the damage will be covered by the surety. Principal will be repaid in this type of bond.

8. Payment bond: Instead of providing protection to project owner or investor this bonds protects subcontractors and laborers. So in this case of if a contractor doesn’t pay the sub-contractor, material supplier or labor as committed to pay they can file claim for their damage and get their payment. • Maintenance Bond: This bond helps the project owner from financial crises that occur because of defective material or bad workmanship within constructions. The time period of this type of bond is 12-24 month.

9. Surety Bond Cost • Although every company has its own set price rate still there is a general thumb rule which is followed by almost everyone. • Bid bond is basically provided on nominal or complementary cost. The range of performance bond premium is .5% to 2.0% or even greater. Price range is affected by the two main factors - one the quality of risk and another one is the amount.