Saturday, January 17, 2015

Surety Bonds - What Are They, How Do They Work and Where Do You Get One


When you deal with construction, either as a general contractor, sub-contractor or as a project owner, you may eventually encounter the need for a surety bond. 

Regardless of where your interests lie in the project, you need to understand the mechanics of surety bonds to understand your options.


What is a surety bond: 
A surety bond is a promise to pay one party (the obligee) a certain amount if a second party (the principal) fails to meet some obligation, such as fulfilling the terms of a contract. The surety bond protects the obligee against losses resulting from the principal's failure to meet the obligation.

A surety bond is a contract among at least three parties:
  • The obligee - the party who is the recipient of an obligation,
  • The principal - the primary party who will be performing the contractual obligation,
  • The surety - who assures the obligee that the principal can perform the task

Commercial and Contract Surety Bonds

Contract(Construction Bonds)
  • Bid Bond:   Required with the Bid Proposal, Bid Bonds guarantee to the owner that you will enter into a contract and provide the required Performance and Payment Bonds if the job is awarded to you.
  • Performance Bonds:  Guarantee that you will complete the contract in accordance to the contract terms for the amount agreed upon and in the time specified.
  • Payment Bonds:  Guarantee that your suppliers, sub-contractors and labor force are paid.
  • Maintenance Bonds:  Guarantee the maintenance on the work performed. These bonds are usually run for one or two years after the bond contract is complete.

 Commercial Bonds 
  • License/Permit Bond:   When one has been granted a license to engage in a particular business or a permit to exercise a particular privilege upon condition that they post a bond with the agency granting the license or permit
  • Judicial Bonds are separated into two categories:
    • Court Bonds - Required in a judicial proceeding where a litigant, in advance of a final decision by the court on the merits of his claim, is allowed the remedy sort in their suit upon the condition that he files a bond.
    • Fiduciary Bonds - Required when one has been appointed to a position of trust to be administered under the jurisdiction of a court, such as an Executor, Administrator, Guardian, Trustee or Receiver
  • ERISA Bonds:   Required to protect the participants and beneficiaries from dishonest acts of a fiduciary who handles the plans assets. ERISA requires every plan to bond any fiduciary and all other persons who handle plan assets.
  • Public Official Bonds:   Required by state, county and municipal officers who are required by law to post a bond for the faithful performance of their duties.

Who do I get a surety bond from? 
 You want to find an agent experienced in and preferably one that specializes in surety bonds for your industry. Agents that work in surety bonds are required to have an insurance P&C License.

 Before you agree to provide a surety bond, be aware that not everyone qualifies for bonding.

What Do I Need To Apply For A Surety Bond?

Initial Information Requirements To Maximize Bonding Credit

  1. Last Three Fiscal Year End Financial Statements (F/S) prepared by a CPA on either a Review of a Fully-Audited Basis. These F/S must be prepared on the Cost-to-Cost Percentage of Completion Method of Accounting with the appropriate Contracts-in-Progress and Completed Contracts schedules;
  2. Six-Month Interim F/S, if the current Fiscal Year End F/S is more than six months old;
  3. Aging Schedule of Accounts Receivable as of the most current F/S date with Subsequent Collections Noted (if not already included in the F/S);
  4. Most Current Corporate Tax Return;
  5. Most Current Financial Statement and/or Tax Return on Affiliated/Related Party Entities;
  6. Personal F/S on all Stockholders/Spouses as of the most current Corporate Fiscal Year End Date. Documentation of personal liquid assets and schedules of rental/investment real estate owned documenting the cash flow of the properties MAY be needed;
  7. Most Current Individual Tax Return on all Stockholders;
  8. Current Schedule of Contracts in Progress;
  9. Fully Completed Contractor Questionnaire;  for LLCs, please provide a copy of the Operating Agreement
  10. Current Letter from the Firm's Bank(s) Outlining; Average and Current Balance, Line of Credit, Terms and Conditions of the Line of Credit, Amount Outstanding Against the Line of Credit, General Comments including the Length of the Relationship
  11. Resumes on all Stockholders and Key Employees;
  12. Current Certificates of Insurance;
  13. Bond Request form, Copy of the Contract, etc. (if applicable)
  14. IF AVAILABLE
  • Supplier Reference Letters and Projects Reference Letters, preferably on the largest completed projects;
  • Business Continuity Plan (such as Buy-Sell Agreement or Life Insurance naming the Firm as Beneficiary).    




Bond requirements may vary depending on the state you are in, so please check with your surety bond agent for further details. Visit the website of  NASBP (National Assocation of Surety Bond Producers) for additional information.

If you're on the East Coast, my personal recommendation is Lou Spina Senior Vice President of Northeast Surety Operations at USI. He brings to the table, more than 24 years of expertise in surety bonding.