What Are Surety Bonds, and When Might You Need One
Jared Hardy, Audit Shareholder
September 19, 2017
Surety bonds are used in the real estate and construction industries to ensure the completion of a contract in the event of a contractor default. If you as a contractor are bidding on work, there is a possibility that contract requires a surety bond. Therefore, let’s first look at the components of a surety bond and then consider how to go about obtaining one. A surety bond acts as an insurance policy between the contractor, the client and a third-party surety bonding company that is designed to protect customers financially, ensuring that the contractor follows through on their contractual obligations. In the event of a default, the surety company steps in to find another contractor to finish the job or to compensate the project owner for the financial loss incurred.
Your first step is to figure out if a surety bond is required for your project or business. If you want to bid on public construction contracts and many private contracts, you’ll likely need a surety bond. Any federal construction contract valued at $150,000 or more requires a surety bond when bidding. Most state and municipal governments, as well as private entities, have similar surety bonding requirements.
Next, determine what type of surety bond is required for your project. Below are different types of surety bonds:
Bid Bond: Bid bonds ensure the bidder on a contract will enter into the contract and furnish the required payment and performance bonds if awarded the contract.
Payment Bond:Payment bonds ensure suppliers and subcontractors are paid for work performed under the contract.
Performance Bond: Performance bonds ensure the contract will be completed in accordance with the terms and conditions of the contract.
Supply Bond:Supply bonds mandate that suppliers provide materials, equipment and/or supplies as defined in purchase orders. If the supplier fails to provide the supplies as agreed, the bond amount can be used to reimburse the purchaser for the resulting loss.
Maintenance Bond:Maintenance bonds guarantee against defective materials and workmanship for a specific time period following a project’s completion. If the project is found to be defective during this time, the bond amount can be used to pay for repairs that need to be made as a result.
Subdivision Bond:Subdivision bonds require contractors to build and/or renovate public structures within subdivisions – such as streets, sidewalks and waste management systems – according to local specifications. If a contractor fails to do so, the bond amount can be used to complete the subdivision project appropriately.
Your final step is to secure your surety bond. Once you’ve found a surety company or agent, you can get started. Most basic bonds can be processed and issued on the same day, but some surety bonds require a CPA prepared financial statements.
Jared Hardy is an Audit Shareholder at Lutz. He began his career in 2005. Jared has significant experience in public accounting, providing accounting, auditing, and consulting services to privately-held companies in a variety of industries.
We work to simplify complexities, help make critical business decisions, and confidently focus on the things that are truly important to you. We embrace your business as our own to spark the right solutions and help you thrive.