Surety bonds are used in the real estate and construction industries to ensure the completion of a contract in the event of a contractor default. If you as a contractor are bidding on work, there is a possibility that contract requires a surety bond. Therefore, let’s first look at the components of a surety bond and then consider how to go about obtaining one. A surety bond acts as an insurance policy between the contractor, the client and a third-party surety bonding company that is designed to protect customers financially, ensuring that the contractor follows through on their contractual obligations. In the event of a default, the surety company steps in to find another contractor to finish the job or to compensate the project owner for the financial loss incurred.

STEP 1

Your first step is to figure out if a surety bond is required for your project or business. If you want to bid on public construction contracts and many private contracts, you’ll likely need a surety bond. Any federal construction contract valued at $150,000 or more requires a surety bond when bidding. Most state and municipal governments, as well as private entities, have similar surety bonding requirements.

STEP 2

• Bid Bond: Bid bonds ensure the bidder on a contract will enter into the contract and furnish the required payment and performance bonds if awarded the contract.
• Payment Bond: Payment bonds ensure suppliers and subcontractors are paid for work performed under the contract.
• Performance Bond: Performance bonds ensure the contract will be completed in accordance with the terms and conditions of the contract.
• Supply Bond: Supply bonds mandate that suppliers provide materials, equipment and/or supplies as defined in purchase orders. If the supplier fails to provide the supplies as agreed, the bond amount can be used to reimburse the purchaser for the resulting loss.
• Maintenance Bond: Maintenance bonds guarantee against defective materials and workmanship for a specific time period following a project’s completion. If the project is found to be defective during this time, the bond amount can be used to pay for repairs that need to be made as a result.
• Subdivision Bond: Subdivision bonds require contractors to build and/or renovate public structures within subdivisions – such as streets, sidewalks and waste management systems – according to local specifications. If a contractor fails to do so, the bond amount can be used to complete the subdivision project appropriately.

STEP 3