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6. Surety bonds, through the surety companies' rigorous prequalification of contractors, protect the owner and offer assurance to the lender, architect, and everyone else involved with the project that the contractor is able to translate the project's plans into a finished project. Before issuing a bond the surety needs to be fully satisfied, among other criteria, that the contractor:
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is of good character;
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has experience matching the requirements of the contract;
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has or can obtain the equipment necessary to do the work;
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has the financial strength to support the desired work program;
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has an excellent credit history;
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and has established a banking relationship and a line of credit.
7. Contract surety bonds:
guarantee the project will be completed;
guarantee that the laborers, suppliers, and subcontractors will be paid;
relieve the owner from the risk of financial loss arising from liens filed by unpaid laborers, suppliers, and subcontractors;
smooth the transition from construction to permanent financing by eliminating liens;
reduce the possibility of a contractor diverting funds from the project; and
lower the cost of construction in some cases by facilitating the use of competitive bids.
8. With a surety bond, the owner can be satisfied that a risk transfer mechanism is in place. The risks of construction are shifted away from the owner to the surety. If the contractor defaults, the surety may pay for a replacement contractor, finance the existing contractor, or provide technical and/or financial assistance.
9. The costs for bonds vary, but generally are one to three percent of the contract amount. On very large projects, the cost may be less than one percent.
10. To bond a project, the owner merely includes the bonding requirement in the plans and specifications for the project. Obtaining bonds and delivering them to the owner is the responsibility of the contractor who will consult with an independent bonding agency.
An owner wants to be satisfied the contractor runs a well-managed, profitable enterprise, keeps promises, deals fairly, and performs obligations in a timely manner. The surety bonding company's prequalification of the contractor provides these assurances to the owner.
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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