A surety bond is a contract between three parties. The first two parties, the client and contractor, enter into an agreement for the contractor to provide a service for the client. The third party in the contract is the bond issuing company. The surety bond issuer guarantees the job will be completed under the terms to which the contractor agreed. The owner or client determines the bond terms during the contract phase, and the contractor is responsible for finding a bonding company to issue the bond for the assignment.
Both contractors and clients receive benefits from using a surety bond to guarantee a contract. For contractors, a surety bond typically includes assistance to help manage time and financial aspects of a project. A surety bond also spells out the exact requirements of the client, and a third-party source is there to ensure the contractor meets all obligations. A surety bond also protects subcontractors and suppliers, to ensure they are paid on time. For clients, surety bonds ensure a larger number of qualified contractors will bid on their job, likely reducing the overall costs and the possibility of a contractor not living up to their part of the deal. A surety bond for an assignment also typically covers material or workmanship issues for the first year after the project's completion.
The price of a surety bond varies depending on the full amount of the contract. The cost is typically based on a percentage of the overall contract, usually from 0.51 to 1.35 percent. For example, a bond for a $1 million dollar assignment might cost $7,700 to $13,500, while a $20 million surety bond could cost up to $146,000. The contractor includes the cost of the bond in the bid to potential clients.
Obtaining a surety bond is a complicated process, so contractors are typically pre-qualifed for a bond before bidding on any jobs. During the qualification process, the bond company will investigate the financial and client satisfaction history of the contractor, along with credit reports, contract schedules, future business plans and quality of tools and equipment. Contractors must also provide a contingency plan detailing how they will complete the project if something unexpected happens, such as the death of the contractor, or dismissal of key personnel.
The job of the surety bond company is to ensure the contractor doesn't default on the contract. The client can rest easier knowing the bond company addresses any defaults or potential defaults. If the bond company sees the contractor faltering, the company might step forward to offer financial assistance, additional staff, personnel with specialized training, or even replace the contractor. This saves the client from having to pursue legal action against a defaulted contract or deal with the stress of finding a new contractor if the original contractor fails. If a contractor defaults, she might find it difficult to obtain future surety bonds for other projects.