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How Surety Bonds Work in Construction
For construction projects, surety bonds are often required by municipal agencies and instill confidence in your company. Let’s take a closer look at how they work.
What is a Surety Bond?
Surety bonds involve three parties:
- The principal (the construction company/contractor)
- The obligee (the municipal agency)
- The surety company
How it works:
1. The principal promises to perform their work as contracted by the obligee.
2. If a construction company fails to meet their contractual obligation for a project, the public or the government agency can file a claim to the surety company.
3. The surety company settles the claim with a financial sum or assigns a new contractor to take over the project.
4. The original contractor is responsible for the amount paid on the claim.
Types of Construction Surety Bonds
- Necessary for the bidding process
- Protects obligee if contractor is awarded bid but fails to sign contract or provide required bonds
- Weeds out unqualified construction project bidders
- Ensures workers, subcontractors, and material suppliers receive payment from contractor
- Protects taxpayers from financial loss should contractor fail to perform duties in accordance with contract terms and conditions
Why a Surety Bond is required?
- Protect the general public
- Ensure project completion
- Ensure payment for all workers and subcontractors
- Create easy transition from financing construction to permanent financing
- Allow for prequalification of contractors
What You Need to Apply for a Construction Surety Bond
- Contract bond application
- Copy of contract (portion that pertains to the insurance and bonding requirements)
- Bond form
- Financial statements
*Larger contracts require more documentation