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1. A surety bond is an instrument under which one party guarantees to another that a third will perform a contract. Surety bonds used in construction are called contract bonds.
2. There are three types of bonds used in construction. The bid bond protects the owner by guaranteeing that the contractor will enter into the contract at the determined price. The performance bond guarantees the performance of the work on schedule and according to the plans and specifications. The payment bond guarantees that certain workers, subcontractors, and suppliers will be paid.
3. Construction is a very risky business. More than 80,000 contractors failed from 1990- 1997 leaving a trail of unfinished private and pubic construction projects with liabilities exceeding $21 billion. (SOURCE: Dun & Bradstreet Business Failure Record).
4. Federal law (the Miller Act) mandates surety bonds for all public works contracts in excess of $100,000. Federal procurement officials may, at their own discretion, require bonds on projects below that amount. All states have laws requiring bonds on public works too (known as Little Miller Acts). Owners of private construction projects are recognizing the wisdom of requiring surety bonds to protect their company and shareholders from the enormous costs of contractor failure.
5. Although surety bonding is considered a line of insurance, it has many characteristics of bank credit. The surety does not lend the contractor money, but it does allow the surety's financial resources to be used to back the commitment of the contractor, thus enabling the contractor to acquire a contract with an owner. The owner receives guarantees from a financially responsible surety company licensed to transact
suretyship.
SURETY BONDS: Financial Security * Construction Assurance
Re-printed from the pamphlet "10 Things You Should Know About Surety Bonding" issued by Surety Information Office
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