Ellen Neylan is the owner of Surety Bond Associates. Surety Bond Associates is the contractor, who on behalf of the City of Philadelphia and the Rebuild Ready Business Support Program, provides the Rebuild Ready business training, workshops, webinars, and technical assistance to construction-related businesses in the City of Philadelphia to assist them in preparing to bid on Rebuild Ready projects and build their capacity.
As the owner of a professional surety company, she gets a lot of questions about the bonding process, what the various types of bonds are, and what the difference is between bonding and insurance. In this guest blog post, she addresses the commonly asked questions and clarifies some of the questions many people have about bonding.
What is a Surety Bond?
A surety bond is a promise to be liable for the debt, default, or failure of another. A surety bond is a three-party contract by which one party (the surety) guarantees the performance of a second party (the principal/contractor) to a third party (the obligee). Surety bonds that are written for construction projects are called contract surety bonds.
Are surety bonds like traditional insurance policies?
No. Surety bonds are almost always written by insurance companies that are licensed by state insurance departments, but they are not like traditional insurance policies. Surety bonds are three-party agreements, and traditional insurance policies are two-party agreements, such as life insurance policies or property insurance policies. The surety does not ‘assume’ the primary obligation, but is secondarily liable if the principal (contractor) defaults on its bonded obligation. If the surety pays a claim as a result of a default, they seek reimbursement from their bonded principal (contractor).
What are Contract Surety Bonds?
Bonds written by a surety company for construction projects are referred to as contract surety bonds. The 4 main types of contract surety bonds are: Bid Bonds, Performance Bonds, Labor & Material Payment Bonds (generally referred to as payment bonds), and Warranty Bonds. The 2 basic functions of these bonds are: Prequalification – assurance that the bonded contractor is qualified to perform the contracted obligation, and Financial Protection – if the contractor defaults on its obligation, guaranteeing that the contract will be performed, and certain laborers and suppliers will be paid for work and materials.
Who do I go to in order to obtain a bond?
As a contractor, you are now ready to position your business to obtain surety credit – to qualify your construction business to get bonds and to grow your business. The first thing you need to do is contact a professional surety bond producer and start developing that relationship.
If you’re new to the construction industry and want to learn everything you need to succeed, register for the Temple Small Business Development Center’s Construction Management Certificate Series. Learn more here.