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March 31, 2015 By Julian

What Is A Surety Bond?

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What is a Surety Bond?

A surety bond ensures contract completion in the event of contractor default. A project owner (called an obligee) seeks a contractor (called a principal) to fulfill a contract. The contractor obtains a surety bond from a surety company. If the contractor defaults, the surety company is obligated to find another contractor to complete the contract or compensate the project owner for the financial loss incurred.

There are four types of surety bonds:

  1. Bid Bond: Ensures the bidder on a contract will enter into the contract and furnish the required payment and performance bonds if awarded the contract.
  2. Payment Bond: Ensures suppliers and subcontractors are paid for work performed under the contract.
  3. Performance Bond: Ensures the contract will be completed in accordance with the terms and conditions of the contract.
  4. Ancillary Bond: Ensures requirements integral to the contract, but not directly performance related, are performed.

When do I need a surety bond?

Any Federal construction contract valued at $150,000 or more requires a surety bond when bidding or as a condition of contract award. Most state and municipal governments as well as private entities have similar requirements. Many service contracts, and occasionally supply contracts, also require surety bonds.

What is SBA’s role?

The mission of the Office of Surety Guarantees is to provide and manage surety bond guarantees for qualified small and emerging businesses, in direct partnership with surety companies.

SBA helps small contractors by guaranteeing bid, performance, and payment bonds issued by participating surety companies for contracts up to $6.5 million. SBA can guarantee a bond for a contract up to $10 million if a Federal contracting officer certifies that SBA’s guarantee is necessary for the small business to obtain bonding.

Are there fees for SBA bond guarantees?

SBA charges the small business 0.729% of the contract price for a payment or performance bond. There is no charge for a bid bond. SBA charges the surety company 26% of the fee the surety company charges the small business.

Related Blogs:
  • SBA Surety Bonds, Pt. 1: What’s A Surety Bond, and When Do I Need One?
  • SBA Surety Bonds, Pt. 2: Applying is Easier than You Think
  • SBA Surety Bonds, Pt. 3: How Surety Companies Can Partner with SBA
  • SBA Surety Bonds, Pt. 4: Giving Contractors and Surety Providers a Faster, More Convenient Application Process

 

Source: State of California Contractors State License Board, “What is a Surety Bond?” http://www.cslb.ca.gov website. Accessed November 11, 2015. https://www.sba.gov/content/surety-bonds-basics

© Copyright 2016. All rights reserved. This content is strictly for informational purposes and although experts have prepared it, the reader should not substitute this information for professional insurance advice. If you have any questions, please consult your insurance professional before acting on any information presented. Read more.

Filed Under: Commercial, Compliance, Theme 134

Comments

  1. Amanda Drew says

    October 31, 2017 at 10:03 pm

    Thanks for letting me know that a bid bond will make sure that a bidder will do the required performance bonds and payments. I want to get some people to make a house for me. The problem is that sometimes it’s hard to know who to trust. I’ll have to get a bid bond to help me with the house.

  2. Ellie Davis says

    July 25, 2018 at 11:34 pm

    Thank you for pointing out that a bid bond ensures the bidder on a contract will enter into the contract and award the payment if awarded the contract. This seems like something that people building anything would want to look into. Hopefully, they find the right surety bond company for them.

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