Embroker helps you get surety bonds, needed as a guarantee to a governmental agency, stating that the hired contractors will perform their duties according to the contract signed for the particular construction project.
What Are They?
A surety bond is a legal agreement between three parties: an obligee, a principal, and a surety. In this equation, your company is the principal and the obligee is the party that requires you to secure the bond; typically a government agency.
The surety bond is a guarantee to the obligee that you will perform your duties in accordance with what is being asked of you in the agreement. The surety bond will protect the third-party that is hiring you to complete a project from any possible losses that would result from your company failing to make good on what was promised in the terms of the agreement.
If this does occur, the third party can file a claim and receive compensation for these losses.
To recap, the obligee is typically a government agency that uses surety bonds as a form of regulation and requires the principle to secure the bond in order to get a license or permit for their work. The principle is the business that needs to obtain the bond in order to get a license or permit to begin working on a project they have been contracted to complete. And finally, the surety is the bonding company that takes the risk over from the business by backing the bond financially.
What Is a Construction Bond?
As mentioned previously, the construction industry is one of the most common examples of an industry in which surety bonds are absolutely mandatory. With the recent resurgence of the construction industry in the U.S., the current climate is making it easier for professionals to secure the right surety bonds for a realistic price.
According to this Willis Towers Watson report, “greater surety capacity than ever is putting downward pressure on rates and improving underwriting conditions for buyers.”
Commonly referred to as “construction sureties” or “building bonds,” the surety bonds for this industry represent a contract that the construction company or contractor signs as a guarantee protecting against a number of possible unsatisfactory outcomes for which the company could be responsible, including a failure to satisfy specifications or finish the project on time. And as anyone who works in the construction industry knows, it’s a high-risk profession in which not everything goes according to plan all the time.
Even though we often consider surety bonds to be a one-way street in which only the principal is held responsible, that’s actually not true. All parties can potentially breach the agreement if either party goes against the terms that have been specified.
Types of Construction Bonds
There are a variety of construction bond types that companies and contractors can secure depending on the specific needs of the project in question. Usually, there are several types of construction bonds that are needed during the course and progress of a project; specific guarantees that need to be made in each phase of the project.
Contractor License: This is the bond that a construction company or contractor must buy at the state, county, or city level before being able to work on any projects.
Bid Bond: The contractor will need this type of surety bond to guarantee that the financial aspects of the bidding information are accurate and that the company or contractor is ready to work on the project if the bid is awarded to them.
Construction Performance Bond: This bond guarantees the contractor’s commitment to carrying out the project in full according to the contract signed between them and the investor.
Payment Bond: This bond guarantees that all subcontractors and workers who will be involved in the project will get paid what they are owed and on time.
Maintenance Bond: This bond guarantees the quality of both the materials that will be used to complete the project and the workmanship itself. If the investor files a claim stipulating that necessary repairs are needed, this bond can cover those costs.
Utility Bond: This bond guarantees that the construction company will pay its utility bills on time and in full.
Supply Bond: This bond guarantees that the materials being used in the construction project will be of the quality that was stipulated in the contract.
Subdivision Bond: This bond requires contractors to build or renovate structures that are referred to as “public subdivision structures.” This includes wastewater systems and sidewalks, among other things.
How to Secure a Construction Surety Bond
The first step every contractor or construction company must take towards securing a surety bond is to make sure that they know which type of surety bond or bonds they need for the project in question. Make sure that you know the bonding amount as well. Regardless of whether you were awarded the project or not, be sure to provide the bid results to your bid agent.
If you are awarded the project, you need to look into what other surety bonds you’re going to need. Most likely, the next one you’ll need will be a performance bond. It’s very important to make sure all of the information on your bond is correct, so double-check everything not only while applying but also when your bond arrives.
Once you have received your bond, you need to file it with the obligee. When you complete the job, you need to also make sure that your bond agent is aware of that fact in order to free up your bond line.
Finally, when the project is complete, see if you need any other bonds, such as a maintenance bond, which is sometimes required by the obligee that requested the bid and performance bonds. If you do end up securing a maintenance bond as well, make sure that you make all of the necessary repairs in the time period during which the bond is active.
Who Are Surety Bonds For?
Surety bonds are an integral part of business, especially in the construction industry, but in many others as well. They provide customers or investors with protection from service providers who don’t meet their expectations. They also allow business owners to protect themselves and their reputations in the case that something that doesn’t allow them to meet expectations occurs during the course of the project.
If you want to be competitive and land the best jobs for your company, you need a surety bond, plain and simple.
Why Do You Need Surety Bonds?
The answer to this question is quite simple: If you don’t secure a construction bond, you’re not going to get any construction project contracts.
The obligee needs assurances that the construction company will fulfill all necessary business practices. If these assurances do not exist, the obligee cannot allow the construction company to work on any projects. If there is no surety bond, there are no guarantees that the architect, engineer, or construction workers will obey any of the building sector rules of the state, city, or county in which the project is going to be built.
There are additional benefits that surety bonds bring to the principal.
First and foremost, purchasing a bond means that your business is extended a form of credit. The bonding company will provide the necessary guarantees on your behalf, and will only require a small percentage of the bond amount to be paid to them. This credit from the surety bond is typically a very cost-effective way of dealing with the aforementioned obligee and state requirements.
The alternatives of posting a cash sum, a letter of credit, or assets to guarantee the payment of claims will typically present a considerable financial burden. Either you’ll have to spend a significant amount of cash upfront or tie up your ability to loan money in the future.
Furthermore, using your assets as a guarantee can be very risky, and lead to significant losses over what could be a temporary setback of having to pay a claim.
Additionally, the surety will do its best to protect you from false or frivolous claims.
They will carefully investigate the claim and bring their expertise and resources to your aid, ensuring that you only need to pay if the claim is reasonable. If you post assets, cash, or use credit to cover the obligee’s requirement, you may end up paying invalid claims.
What Do They Cover?
What’s interesting and unique about construction bonds is that they do not protect the party that is purchasing them. Contractors purchase bonds so that developers and property owners will hire them for a specific project. So the bond is actually protecting the property owner or developer, not the contractor that has purchased it.
Most construction contracts have provisions that state what happens if a contractor does not complete a project as was agreed in the contract, but there is no financial protection for the developer if something goes wrong. Construction surety bonds provide that protection.
When a developer requires bonds from contractors, they are protecting themselves from additional costs that could result from the contractor being unable to fulfill their contractual obligations, which is especially important when the projects are public and are being financed by public funds.
How Long Does a Surety Bond Remain Valid?
A surety bond will typically be valid throughout the contract it’s taken out for.
Furthermore, many bonds will have extensions written in to account for maintenance. This extension period can sometimes run for a whole year after the contract has been concluded. The maintenance period is added to protect the obligee if there’s a problem after the project is completed or something needs to be reworked. It also protects the principal, allowing him time to object to claims they feel are unwarranted.
What’s Not Covered?
Since surety bonds are not insurance, they will not cover anything that would be covered by some of the essential business insurance policies that every construction company should obtain.
Also, it’s important to note that if your business is looking to buy a construction bond, you will probably be asked for proof of insurance before you can purchase the bond. Business insurance adds another layer of protection, which is why developers will also want your construction company to show your certificates of insurance before deciding to hire you.
Most developers and property owners will want your construction company to have general liability, commercial property, and workers compensation insurance policies at least before giving you the job.
Once again, it’s important to reiterate that surety bonds do not protect the construction companies that purchase the bond. In order to protect yourself from property damage, third-party property damage and injuries, reputational harm, and employee injury claims, you should be buying the business insurance policies that protect against these risks.
What Do They Cost?
The price of your surety bond will depend a lot on the conditions of the agreement or contract that the bond is going to cover. Surety companies look at many factors when determining premiums but will pay special attention to your credit scores. As we mentioned earlier, surety bonds are more similar to loans than insurance policies.
If you have an excellent credit score, expect to pay in between 1-5 percent of the bond amount. Companies with poor credit scores could pay as much as 20 percent of the bond amount. To put this into numbers and get a better idea of premiums, if securing a $50,000 surety bond, a construction company with good credit can expect to pay in between $500 – $2,500 while a company or contractor with poor credit could pay as much as $10,000.
Why Get Them With Embroker?
We’ve made it easier than ever before to purchase surety bonds. How easy? You can talk to our advisors and secure the right bond right now.
As a digital company, Embroker passes the savings for unnecessary administration on to you—for the most competitive price of surety bonds you’ll find anywhere.
Protect your business with the broadest coverage in the industry. You can tailor the terms of your surety bond to your needs.
We provide you with expert support no matter your question: Reach us 24/7 via phone, email or live chat. You even get a personal account manager to look after you and your insurance needs.
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