Many public and private contracts require surety bonds, offered by surety companies. Surety bonds are a three-party agreement between the owner, contractor and surety company. A surety bond is like insurance and can cover subcontractors that have not been paid, damage that occurs from the project, or if a project is not completed within the requirements of the contract.
Surety bonds can help small businesses win contracts by providing the customer with security that the contract will be completed. Bonds are most often required in the areas of construction, information technology, and other areas where the risk to the customer can be high.
Surety bond premiums vary and typically range from 0.5% to 2% of the contract amount, or higher in the cases of high-risk businesses, and depend on size, duration of the project and contractor requirements.
What is needed to get a Surety Bond
Requirements will differ from company to company. Generally, a business owner can expect to need,
- Good references and reputation.
- The ability to meet current and future obligations.
- Experience matching the contract requirements.
- The necessary equipment to do the work or the ability to obtain it.
- The financial strength to support the desired work program.
- Credit history.
- An established bank relationship and line of credit.
Businesses that have challenges qualifying for a surety bond with a surety company, can work with one of the programs below to improve their ability to qualify.
Help Getting a Surety Bond
SBA Surety Bond Program
The Small Business Administration’s Surety Bond Program helps small and emerging business who have the knowledge and skills for success, but lack the experience and financial strength to obtain bonds through regular commercial channels. The program guarantees surety bonds for surety companies, which allows those companies to offer the bonds to small businesses who wouldn’t qualify for commercial bonds without the guarantee.
The Surety & Fidelity Association of America
The Surety & Fidelity Association of America includes on its website, key information about surety and fidelity bonds. Resources include short videos, studies, links to local resources, as well as the booklets “Why Get a Bond?” and “How to Get a Bond.”
US DOT Bonding Education Program
The US Department of Transportation (DOT) Bonding Education Program (BEP) partners with The Surety & Fidelity Association of America (SFAA) to help small businesses become bond ready. The program is hands-on, multi-component and designed to address what businesses need to do to become bond-ready. It also includes one-on-one sessions with local surety bonding professionals to help gather the materials necessary for a complete bond application. This program is tailored to businesses competing for transportation-related contracts. The SFAA runs the Model Contractor Development Program with the same workshops and one-on-ones with other stakeholders for non-transportation-related contractors.
Benefits of Getting a Surety Bond
In addition to providing the project owner the assurance that the contract will be performed, having a surety bond, and a strong relationship with a surety company that backs your business, has other advantages.
- Your business can be more competitive and attractive as a subcontractor, prime or joint venture partner.
- The surety underwriting process provides guidance, discipline and benchmarking to help your business.
- Your business can expand with the backing of a surety’s balance sheet.
Learn More – Types of Bonds
Contract Surety Bonds
Ensure the terms of a specific contract are fulfilled. Contract bonds are not the same thing as license bonds, which may be required as part of a license. Below are the primary types of contract surety bonds.
Bid Bonds – guarantee a contractor will enter into a contract if the bid is awarded and will provide the required performance and payment bonds.
Performance Bonds – guarantee the contractor will perform the work in the contract according to its terms.
Payment Bonds – guarantee the contractor will pay for services, especially subcontractors and materials.
Maintenance Bonds – guarantee the contractor will provide facility repair and upkeep for a certain time.
Commercial Surety Bonds
Ensure all applicable laws and regulations are followed. Government agencies require certain companies or individuals to obtain commercial bonds, which protect the general public against things like fraud.
License and Permit Bonds – guarantee the license or permit holder will comply with laws and regulations. Examples include, plumbers, electricians, customs bond for importing, tax bonds, environmental protection bonds and more.
Court Bonds – guarantee the payment of costs in a proceeding or a court judgment.
Fiduciary Bonds – guarantee the carrying out of duties faithfully as prescribed by statute.
Public Official Bonds – guarantee the honesty and faithful performance of people elected or appointed to positions of trust.
Miscellaneous Bonds – guarantee other unique business needs not covered above. Examples include hazardous waste removal and self-insured workers compensation guarantee bonds.
Business Services Bonds
A surety bond to safeguard clients from theft. Most common in home health care, janitorial service and such.
Why do companies need surety bonds? Some business is risky, especially construction. Over twenty percent (20%) of new construction firms fail in their first year. Even large established contractors can fail, with examples ranging from J. A. Jones to