While contractors pay the surety bond premiums, the price of payments is figured into the contract. So, while builders pay the premiums, the property owner is also paying for the bond as part of the contract price. The surety reviews the contractor's history and qualifications before issuing these payment and performance bonds. These bonds help protect the property owner from loss should the contractor default or fail to live up to the contract.
Surety bond-type instruments have existed since the beginning of recorded history. In modern times, a surety bond involves three parties -- the surety, the contractor and the property owner. Usually, the process entails three distinct bonds. The bid bond guarantees the bidder enters the contract at the price bidded and provides payment and performance bonds. The performance bond protects the property owner if the contractor does not live up to the contract, while the payment bond ensures that the contractor pays for the project's labor and materials costs.
Benefits from surety bonds go far beyond the owner, affecting virtually every entity involved in the project. Material suppliers, laborers and subcontractors know they will eventually be paid, and municipalities do not have to release performance bonds until a developer makes good on all improvements agreed to in the project approval. Other beneficiaries include the financial institutions lending funding for the project, and a project's engineers, architects, lawyers and managers.
Who Must Use Surety Bonds?
Public construction requires the use of surety bonds, and local governing bodies establish the need for surety bonds by ordinance in connection with private major development or subdivisions. For smaller projects, obtaining surety bonds are the owner's decision unless a lender requires them. While the costs of the premiums for the bonds do inflate the overall price of construction and contracts, it can be a case of being penny-wise and pound-foolish if problems arise and there is no bond in place.
Obtaining a Surety Bond
Surety companies generally distribute surety bonds through agencies, as in other types of insurance products. Contractors should contact a professional surety bond producer or broker through an agency. These bond producers guide the applicant through the process, establishing a relationship for him with a surety company. Surety bond producers review contracts and offer business and technical advice. After reviewing the contractor's needs, the application for the surety bond is sent to a company best suited for the particular client's project.
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