Whether it's a parking lot or levee, highway, or hospital, you'll usually need a to guarantee your work on a state or federal construction project. Federal contracts valued at over $150,000 require a surety bond. If you want to learn more about various types of surety bonds, this will be a helpful guide. At Gray Surety, we're committed to underwriting surety bonds that help companies grow their business in a responsible manner. We know a major part of that starts with education. This post covers what is a surety bond, how they work, and whether you need one for your contract.
What is a surety bond?
A surety bond refers to a type of insurance that ensures certain contractual obligations are met. It's typically required by federal or state agencies before a contractor takes on large government construction projects. In the case that a contractor fails to complete a project, a surety bond helps the government agency reduce their own financial risk.
A surety bond is a three-party contract consisting of the following parties:
- Principal: The person who must complete a project
- The obligee: The agency in need of a guarantee that the principal will complete the project
- The surety: The issuer of a surety bond that guarantees the principal party will meet obligations
Simply put, a surety bond requires the surety provider to pay a set amount of money to the obligee in the event that a principal fails to live up to their contractual obligation.
How does a surety bond work?
Surety bond companies play an important role in large-scale projects. They analyze the contractor's ability to complete a project by using on their own industry expertise, as well as a detailed analysis of the contractor's:
- Capacity to finish the job
- Current financial condition and available capital
- Previous character and work history
In this way, sureties help construction contractors, and the producers working on their behalf, to bid on and obtain projects they can reasonably and responsibly complete. They also provide an additional level of vetting before government agencies take on contractors.
What are the major types of surety bonds?
Surety bonds aren’t "one size fits all." There are different types of surety bonds that are all designed to address a range of different situations. However, they do have many shared characteristics, including:
- Bond premium: A fee charged by the surety, and paid by the principal, on an annual basis. It is usually anywhere between 1% and 15% of the bonded amount.
- Bond capacity: The maximum amount a principal can obtain based on working capital and business equity. Working capital refers to current assets minus current liabilities. Equity is the investment amount in the company plus earnings.
- Bond penalty: Liability limit placed on the bond that indicates the maximum amount the obligee must pay in the event of a loss.
- Bond termination: Bonds typically expire upon project completion. Others carry a term of one to four years, while others are non-cancelable and only expire when the agreement is met.
Now that we’ve covered important shared characteristics of surety bonds, we'll take a closer look at the two most common types of surety bonds. At Gray Surety, these are also the types of surety bonds we specialize in: contract surety bonds and commercial surety bonds. Read on for a detailed explanation of each.
Contract surety bonds
Surety bonds that are specific to construction projects are contract surety bonds, also commonly known as a contractor bond or construction bond. If you're bidding on a state or federal construction project, you'll often need a surety bond to guarantee your work to the government agency.
Even many private owners require a bond for projects of a certain size. These bonds help owners reduce and transfer their risk if contractors fail to perform their part of a project.
At Gray Surety, we’re committed to helping you find responsible surety bond opportunities for your next project and beyond. We offer a variety of contract bonds, for every stage of a project's timeline. These include:
- Bid bonds: Financial protection for the owner if a bidder is awarded a contract yet fails to sign the contract or provide performance and payment bonds
- Performance bonds: In the event of a contractor’s default, the owner has a guarantee that the surety will complete the contract
- Payment bonds: Provides assurance that subcontractors and suppliers will be paid for labor and materials
- Warranty/maintenance bonds: Guarantees that any workmanship and material defects found in the original construction will be repaired during the warranty period
Commercial surety bonds
A commercial surety bond is a bit different. Instead of dealing solely with construction, it guarantees that an individual or contractor acts ethically within their industry. They may be necessary to obtain business licenses or permits in your state, or when opening a new location. Further, contractors may need commercial bonds when manufacturing custom components or designing software.
At Gray Surety, we offer a variety of commercial surety bonds, including:
- License and permit bonds: Required by government agencies as a condition for obtaining a license or permit. These bonds include contractor license bonds and auto dealer bonds among others for various occupations and professions.
- Judicial bonds: A requirement for plaintiffs and defendants in judicial proceedings to reserve the rights of the opposing litigant and other interested parties.
- Probate bonds: Required for those who administer a trust under court supervision. Under this classification, bonds include executor and administrator bonds, trustee bonds, guardian bonds, and conservator bonds.
- Public official bonds: A requirement for certain public officials to protect the public from malfeasance or failure to faithfully perform duties. For example, public official bonds include county clerk bonds, tax collector bonds, notary bonds, and treasurer bonds.
Beyond this list, Gray Surety also offers commercial surety bonds related to taxes, lost securities, and non-construction performance. Commercial bonds are more similar to insurance policies because they have an expiration date. Commercial bond terms are typically set for one year with renewals required every successive year.
Do I need a surety bond?
If you’re being told that you need a surety bond, you may be unsure where to begin. Perhaps you’ve never heard of one until now. We're here to help.
In general, if you’re a contractor seeking a government contract, you probably do need a surety bond. They are also typically a requirement for any person or company licensed by a government agency. A surety bond is simply the best way for an obligee to avoid possible damages if you do not hold up your end of a contract.
Let's get to yes
At Gray Surety, we understand that the surety bond process can be complex, so we are upfront about information from day one. Whether we're underwriting a bond for a large construction project or a smaller licensing bond, we remain committed to helping you grow your business responsibly.
For surety agents, we’ve integrated value-added business intelligence products into our underwriting process. Our financial analysis tools allow us to understand and quantify a contractor's financial capacity. When we say "yes" at Gray Surety, it's because we know that we can provide the support your contractors need. Our goal is to build long-lasting and collaborative relationships with agencies, producers, and their contractors.
Ready to see if Gray Surety can get you to yes? Our producers and their associated agencies are an invaluable resource for guiding you through the surety submission process. If you're not already working with a surety agency, you can find one here.
Have questions? Contact Gray Surety today to learn more about our services and how we can help you.