Surety bonds are used to manage the contract risk for construction projects, satisfy licensing requirements, and other applications. But what does that mean for your business? Learning the basics about surety bonds can help you understand why a surety bond would be required and how they work.
- Whether you’re the business requesting the bond or the party who needs a bond, understanding what the bond means is the first step in understanding how it affects your business!
- There are three parties involved in a surety bond. The principal, which is the person who takes out the bond as a guarantee that they will comply with a contract or abide by licensing regulations. The obligee, this is the individual or organization that requires that the bond be taken out to protect themselves or the public from extra costs should the terms of a contract or license not be fulfilled. The surety, which is the company who underwrites the bond and provides the financial recompense should a contract or requirement not be fulfilled.
- There are three types of surety bonds generally used in the construction industry: bid bonds, performance bonds, and payment bonds. These bonds provide protection for different types of contract. A bid bond provides a guarantee that a contractor is entering a bid on good faith and intends to complete the project to the bid specifications. A performance bond guarantees that a contractor will perform to the contracted standards. Payment bonds define the payment terms of a contract and provide financial backup should payment not be completed.
- With License and Permit bonds there are many types depending on the type of license you seek or permit you are applying for. These bonds cover the licensee or permit holder to guarantee that they fulfill their obligations under the license or permit.
- Bond premiums are influenced by a number of factors. Many businesses are surprised to learn that their experience, business finances, and credit score all play a role in determining the bond cost. Improving your credit score and maintaining accurate business records that show a strong financial history can help your business lower the cost of bond premiums. Work with an experienced surety bonding company to ensure that you get the best premium rate for your business.
- The bond will outline the compensation options that the surety company may use to provide recompense to the obligee. These can include finding an alternative contractor for construction projects, opening the contract to new bidders, paying the financial penalty outlined in the bond, or any other defined option. For license and permit bonds, the surety will work with the principal and claimant to attempt resolution. If a resolution is not reached, the surety will pay out if the claim is found to be legitimate.
Surety bonds can seem confusing, but they don’t have to be. Use Viking Bond Service to get an affordable bond when you need it. Call, email, or use our online application to get started. Most bonds can be approved and quoted regardless of credit, and on the same day, the application is received.