What Is Involved In Surety Bonds?

Business Blog

Are you a small business owner that has a project that needs to be completed but you want to make sure that your interests are protected? A surety bond may be what you are looking for. This is a type of contract that ensures a project will be completed even if the contractor defaults. Surety bonds are guaranteed by the Small Business Administration, but the actual bonds themselves are issued through surety companies or agencies. But how does a surety bond work, and more importantly, what is involved in obtaining one?

Types of Surety Bonds

There are four main types of surety bonds. These are:

• Ancillary bonds: ensures that the requirements of the contract are fulfilled
• Bid bonds: ensures that the bidder will enter the contract as well as provide the agreed upon payment and performance bonds if the contract is awarded
• Payment bond: ensures that the contractors and suppliers involved in the contract will be paid for work performed
• Performance bond: ensures that the contract will be completed per the terms and conditions outlined

Parties in a Surety Bond

There are three main parties involved in a surety bond. These parties are:

• The obligee: this is the party who is the recipient of the work outlined in the contract
• The principal: this is the party responsible for performing the work outlined in the contract
• The surety: this is the party that guarantees that the principal will fulfill the contract

Role of the Small Business Administration

The Small Business Administration is responsible for guaranteeing any surety bond that is issued by an approved surety company. These bonds are guaranteed for up to $6.5 million; however, federal contracts can be guaranteed for up to $10 million if necessary. The Small Business Administration works directly with surety companies and charges a fee to the small business in the event of a payment or performance bond. A fee is also charged to the surety company based on how much the company charges the small business.

When a Surety Bond is Required

A federal construction contract that has a value of at least $150,000 will require a surety bond. State and municipal governments can also require a surety bond, but the requirements will vary based on state laws. 

If you are concerned about a project being completed or want to make sure to protect your interests, contact a surety company in your area like NFP, P & C, Inc. today. They can go over the different options for surety bonds that may be available and advise on what will be the best option for your project.

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12 January 2015