The way project owners evaluate and manage risks on construction projects and make fiscally responsible decisions to ensure timely project completion are crucial to their success. Since private owners cannot afford to gamble on a contractor whose reliability is uncertain or who could end up bankrupt halfway through the job, a surety bond is a great safety net for the investment.
Suretyship is a very specialized line of insurance that is created whenever one party guarantees performance of an obligation by another party.
A surety bond is a written agreement that includes three parties:
There are two main types of surety bonds, contract (or corporate) surety bonds and commercial surety bonds.
Contract (or corporate) surety bonds provide financial security and construction assurance for building and construction projects by assuring the project owner (obligee) that the contractor (principal) will perform the work and compensate certain subcontractors, laborers and material suppliers, as outlined via their contract. Contract surety bonds include the following:
Commercial surety bonds guarantee performance by the principal of the obligation or undertaking described in the bond. Commercial surety bonds include the following:
It’s important to recognize the similarities between suretyship and other forms of insurance:
State insurance commissioners regulate both suretyship and other insurance. They both provide a safety net for financial loss.
Key differences exist between suretyship and other insurance:
The current federal law on federal public works is known as the Miller Act, which requires performance and payment bonds for all public work contracts in excess of $100,000 and payment protection, with payment bonds the preferred method, for contracts in excess of $25,000. Almost all 50 states, the District of Columbia, Puerto Rico and most local jurisdictions have enacted similar legislation requiring surety bonds on public works as well.
The article was written by Kenny Albert.
Kenny first joined Houchens Insurance Group as an intern while attending the Western Kentucky University. After graduation, he was hired as part of the Surety Bond Department team in 2011. Kenny’s passion lies in helping contractors grow their business by obtaining the bond program they need, helping to manage their risks and insurance programs, and advise on overall financial structure, cash flow management, operations and continuity to help his clients achieve their goals.