Can Subcontractors Recover Interest From a Surety Bond?

by Jeannine Mancini

A surety bond is designed to offer protection for the construction company performing work in the event that the contractor fails to pay. Surety bonds are promises among three or more parties. In some cases, surety bonds are required when a project exceeds a certain amount. A surety bond eliminates the risk involved in performing a service. The bond is designed to cover the amount a subcontractor is anticipated to receive and does not include interest.

Types of Bonds

The type of surety bond you select depends on the type of assurance you desire. A bid bond guarantees the contractor will enter into the contract at the bid price. Subcontractors also pursue performance bonds to protect from loss in the event the contractor fails to meet the contract terms and conditions. The payment bond makes sure a contractor pays the subcontractors, laborers and any others who worked on the project.

Cost of Bonds

On certain public works projects in excess of $100,000, contractors are required to obtain a surety bond. For non-public works projects, surety bonds are optional. It is the contractor's responsibility to purchase a surety bond. Typically, the cost of a surety bond premium is 1.5 to 2 percent of the contract amount. The premium can also be dependent on the size, type and duration of the project. Contractors generally include the premium cost in the bid.

Obtaining a Surety Bond

Since surety companies are taking a monetary risk, the contractor's business operation is carefully reviewed before a bond issued. The company will likely check references to ensure the contractor has a good reputation. Credit history and an established banking relationship are additional criteria that must be met. If the contractor is unable to prove financial stability, the chances of getting a surety bond are slim. Subcontractors should proceed with caution when moving forward with a contractor who is unable to meet the qualifications for a surety bond.

Collecting on a Surety Bond

Subcontractors who would like to collect on a security bond must file a claim within the state's statute of limitations. The surety company has the ability to pay on a written claim without the court's involvement, however, some require you to obtain a judgment by filing a lawsuit against the contractor and surety company.

Photo Credits

  • Digital Vision./Photodisc/Getty Images