Surety bonds are usually required of general contractors on public projects. Nowadays, more and more sub-contractors are finding that they also must provide bonds. A surety bond is an agreement under which one party (the surety) guarantees to another (the owner or obligee) that a third party (contractor) will fulfill a contract in accordance with specifications agreed upon within the contract.
There are four common types of contract surety bonds:
- Bid Bond – provides financial assurance that the bid has been submitted in good faith and that the contractor intends to enter into the contract at the price bid.
- Consent of Surety or Agreement to bond – guarantees that the required performance and payment bonds will be provided should the contractor be awarded the project.
- Performance Bond – protects the obligee from financial loss should the contractor fail to perform the contract in accordance with the terms and conditions of the contract.
- Labour & Material Payment Bond – guarantees that the contractor will pay the certain subcontractor, labor and material bills associated with the project.
Most companies that issue surety bonds work through agents or brokers, so your first step in acquiring a bond is discussing your plans with your representative. Generally the best qualified to help you get your bond is a broker who specializes in surety bonding. But keep in mind that qualifying for bonds is similar to obtaining bank credit. Similar to any banking institution, a surety company needs to know you well before making any commitments. This process can take some time to complete.
The first step is gathering information and presenting data to underwriters:
(1) the surety company wants to verify that the contractor is of good character,
(2) has experience matching the requirements of the project and
(3) has (or can acquire) the necessary equipment to complete the project.
Secondly, they need to make sure that the contractor has healthy financials (usually established over three years of history.) This essentially means that he/she can support the project and has a history of paying contractors and vendors (so if you don’t pay your bills, you probably won’t move beyond this point in the process!) Finally, they’ll also need to confirm that the contractor is in good standing with other financial institutions.
“The surety wants to be satisfied that the contractor is a well-managed, profitable enterprise who keeps promises deals fairly and performs obligations in a timely manner.” [Source: Surety Association of Canada]