Surety BondsCommercial - License & Permit - Construction
What are Surety Bonds?
A surety bond guarantees the completion of a contract. Should the principal, the party to perform the contractual obligation, fail to fulfill the terms of the contract the bond is forfeited to the obligee, the party requiring the contract be performed. The surety is the financial institution guaranting that the principal will complete the contract. However, surety is not insurance. Should the principal fail to complete the contract and the bond is paid out, the surety then has the right to collect that amount back from the principal.
Construction and Contract Bonds
Construction bonds and contract bonds are commonly referred to the same type of surety bond. These bonds guarantee that certain types of contracts are completed. Most surety bonds in construction are performance bonds which guarantee the project will be completed.
What do construction bonds cost?
The cost of a construction or contract surety bond depends on both the size of the bond and the financial stability of principal. The principal is the party with the contractual obligation. Sureties like to see a financial strong principal with plenty liquid assets and cash flow. The assets indicate that should the bond be claimed, the principal will be capable of paying back the surety. Cash flow is an indicator that the principal has the money on hand to pay his employees, buy supplies, and ultimately complete the project. So the better your credit and the stronger your financial statements, the better the rate you will get on your bond.
I have good credit, why is the rate of my surety bond so high?
A third and very significant factor in pricing surety bonds is the contract or bond form itself. Depending on the terms of the contract, the bond could cost considerably more. Some bond forms are particularly unfavorable to the principal and surety. Bonds that force the full payment of the bond should their be a claim are called forfeiture bonds. These typically are very expensive if not very difficult to write at all. We have commonly seen these in the medical marijuana industry where the government entities making the bond requirements don’t understand the surety industry.
The most common bonds people see are performance bonds. Performance bonds guarantee that a contract is completed according to the contract. The contract may contain time constraints making it more onerous and expensive. The amount of the bond is generally determined by the cost of the project.
Bid bonds are guarantees that should the contractor’s bid is accepted, he is financially capable of completing the project at the price that was bid. Should the contractor or principal fail to do so, the obligee can claim the bond and hire another firm to complete the project.
Payment bonds guarantee the principal will pay for all the supplies and services on a given project. This is to protect the owner of the project should the principal fail to pay his suppliers, subcontractors, or other obligations. Should this occur the owner or obligee can claim the bond and pay the necessary parties.
Other types of contract bonds
There are many other types of construction bonds available. A few include, maintenance bonds, subdivision bonds, site improvement bonds, and environmental bonds.
License and Permit Bonds
Certain licenses and permits generally require bonds associated with them. These bonds guarantee one does not violate the terms of the license or permit. Common types of bonds include, freight forwarding bonds, customs bonds, auto dealer bonds, broker bonds, and contractor license bonds.
Commercial bonds cover a vast category of surety bonds. Private companies, state and city governent agencies, professional agencies all require bonds. Commercial bonds include, business service bonds, crime bonds, utility bonds, title bonds and more.
Even More Surety Bonds
Other categories of bonds include judicial bonds, probate bonds, and fiduciary bonds. If you have any questions or would like to learn more about surety bonds please feel free to contact us.