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Surety Bonds: Everything you need to know

A surety bond is a promise to be liable for the debt, default, or failure of another. A surety bond protects the party known as the oblige –the entity to whom the bond is paid to in the event of a default – against losses, up to the limit of the bond. These losses result from the principal’s – the party with the guaranteed obligation – failure to perform its obligation such as the completion of a project. The surety, for example, an insurance company, assumes the obligation if the principal cannot.
The bond assures the oblige that the principal will act in accordance with certain laws. If the principal fails to perform in this manner, the bond will cover resulting damages or losses. Although often overlooked, depending on your country, surety bonds are very important. Some countries have made them a requirement when reaching out for government contracts above a certain threshold.
It is important to note that surety bonds do not replace insurance for your business, and it is not the same as workers’ compensation insurance.

How Does Surety Bonds Work?

Surety bonds provide financial guarantees that contracts and other business deals will be completed according to mutual terms. Surety bonds protect consumers and government entities from fraud and malpractice. When a principal breaks a bond’s terms, the harmed party can make a claim on the bond to recover losses. The surety company then has the right to recover these monies from the principal in the case of a paid loss or claim.

Surety Bond Requirements

Surety bond requirements vary according to location, but there are a few things that remain constant. Principals must show they have good credit and a good reputation before a surety company will grant them a bond guarantee. They must show to some degree that they can manage the needs of the project. Surety companies often require principals to show they have the equipment, experience and financial resources to carry out the contractual obligations.

Surety Bond Examples

Examples of surety bonds comprise advance payment, trade guarantees, construction, performance, warranty, and maintenance bonds.
Let’s consider a real-life scenario.
A local government agency (Obligee) wants to construct an office building. They decide to hire Mr. Contractor (principal) for the job. Mr. Contractor is required by the local government agency to secure a construction performance bond to guarantee that they will fulfil the terms of the contract. Mr. Contractor will buy a construction performance bond form a reliable and trusted surety company.
If Mr. contractor fails to complete the project, they then default. The local government agency can, in turn, make a claim on the bond with the surety company. The surety company can now recover these funds from Mr. Contractor over time according to the surety contract.

How to Get a Surety Bond

You can get a surety bond from an approved surety agency that is licensed in your locale. Go in prepared, know the kind of bond you need and the amount. Most surety agencies will know the bond type and amount your industry requires but being prepared speeds up the bonding process.
Once you’ve contacted the surety agency, they will work with you to provide a suitable and cost-effective option based on your needs.

Types of Surety Bonds

Contract Bonds and Commercial Bonds are two main types of surety bonds. Contract bonds are used mainly in the construction industry and guarantee a specific contract. Examples include Performance Bonds, Bid Bonds, Supply bonds, Maintenance Bonds and Subdivision Bonds. Commercial bonds satisfy the security requirements of public, legal and government entities and protect against financial risk. These bonds guarantee that the business or individual will comply with all required legal obligations.
Surety bonds help to protect the financial interests on all parties involved in the contract. While they may seem complicated, there is always help available to get started. At Risiko, we can help. We protect your company through bonds and insurance.

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Construction Bonds: How they Work, The Types, and More

A construction bond is a surety bond that protects against financial loss on a construction project. It is a contract between a contracting entity or the person who is having work done, the contractor or the person doing the work, and the bond issuer or surety company who is making sure that the work gets done.

How Does a Construction Bond Work?

These bonds function as financial security for contracting entities and they guarantee compensation if the contractor violates the conditions of the agreement. Construction bonds are issued for a specific value which represents the maximum compensation that the surety may extend to the contracting entity. Compensation is made if the contractor violates the agreement, causing losses or damages, and the contracting entity files a claim against the bond. Simply put, if the work isn’t completed or if there is damage as a result of the work, then the surety company will pay the damages to the customer. However, they do not stand the final liability. Even if they cover the claim, the bonded contractor must reimburse the surety in full.

Types of Construction Bonds

There are three types of construction bonds. These are Bid bond, performance bonds and payment bonds.

Bid bonds – these are sometimes required by governments to guarantee that contract bids are made in good faith. They are meant to protect the contracting entity against any frivolous or low-ball construction bids. Before bidding on a public works project, a contractor will need to secure a bid bond. This bond guarantees that if the bid is selected, the contractor accepts the job and will perform it for the price bid. If they default, the public entity can make a claim against the bond as a penalty.

Performance bonds – these ensure the construction work will be completed on time and to the required standard. A performance bond guarantees that the contractor will fulfill all their obligations under the contract. If the contractor fails to perform according to the contract, the entity can submit a claim against the bond. The surety company can decide to pay for the cost of completion, finance the current contractor, or takeover the completion of the project by hiring their own contractor.

Payment bonds – these give financial protection to subcontractors and others who provide services and materials to the construction company. If a project participant goes unpaid, they can make a claim against the bond. Consider a payment bond as a “pile of money” that protects the property from lien claims.

Are Construction Bonds Refundable?

There is no straightforward answer to this question since there are many factors to consider. There are many aspects involved when determining whether a construction bond is refundable or not. For instance, when a construction bond is first purchased, it is fully earned during the first term. In this case, the contractor may not be eligible for a refund. However, if the bond was never submitted to the contracting entity, then it may be possible to qualify for a full, partial, or pro-rated refund depending on the situation. Other situations that may determine eligibility for a refund include a business being bankrupt, or if the contractor purchased the wrong bond. It is important to speak directly with the surety company as they will provide guidance on this process.

Construction bonds are important for contractors and contracting entities in order for them to protect their financial assets. While they may seem complicated, there is always help available to get started on these. At Risiko, we can help. We protect your company through bonds and insurance.