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An Overview of Contract Surety

by Surety Admin 12. May 2011 04:45

Applying for a Contract Bond is a time consuming project. For new contractors, it is helpful to have an overview of the basics. Contract surety bonds guarantee that contractors will honor a contract for a construction project and that they will pay subcontractors, laborers, and material suppliers as agreed.

There are three basic types of contract surety bonds.

·        A bid bond guarantees a contractor will complete a project at the bid price.

·        A performance bond protects an owner from financial loss should a contractor fail to work in accordance with the terms and conditions of the contract.

·        A payment bond ensures that a contractor will pay subcontractors, laborers and material suppliers.

Sureties underwrite contract bonds based on an evaluation of a contractor’s business. The surety must be satisfied that a contractor runs a well-managed, profitable enterprise and meets obligations in a timely manner. They consider the following:

·        Ability to meet current and future obligations

·        Experience matching the contract requirements

·        Availability of the equipment needed to do the work or the ability to obtain it

·        Financial strength to support the work program

·        Credit history

·        An established bank relationship and line of credit

·        References.

Surety bond premiums vary from one surety to another, but can range from 0.5% to 2% of the contract amount, depending on the size, type, and duration of the project and the health of a contractor’s business. Typically, there is no direct charge for a bid bond. In many cases, a performance bond incorporates the payment bond and a maintenance period.

The contractor includes the bond premium amount in a bid and the premium generally is payable upon execution of the bond. If the contract amount changes, the premium may be adjusted for the change in contract price. Contract surety bonds protect public owners, private owners, lenders, and prime contractors from the expense of contractor and subcontractor failure.

The Surety Group was founded in 1977, specializing in contract surety bonds for the construction industry. We are one of the few agencies in the US with bond agents who work exclusively on contract surety. Have a question? Call us at 800-486.8211.

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