What is a contract surety bond?
A contract surety bond is a very unique relationship between a contractor, project owner and the surety company, facilitated by us as your insurance broker. Regardless of the scope of the construction project, contract bonds ensure the obligations made as part of a construction contract will be met.
Who needs a contract surety bond?
Typically this type of bond is used by general contractors, construction companies and government subcontractors when completing commercial and government real estate projects.
How do I know what type of contract surety bond I need?
There are three main types of surety bonds. The type of bond you require depends on your current situation but in many cases, contractors may need all three of the following:
A bid bond provides your guarantee that, when bidding on a project, the bid has been submitted in good faith. It is the full intention that if your company is selected as the successful bidder, you will assure the pricing you have provided and will provide necessary performance and payment bonds when necessary.
A performance bond is exactly that – a guarantee that your company will perform the duties and responsibilities as outlined in the contract. If you are unable to create work as described or meet timelines, your inability to perform will cost your customer money in financing, perhaps late penalties, lost revenue and more. A performance bond gives your customer the protection they need to avoid financial loss because of your inability to fulfill the contract.
Labour and Materials Payment Bond
A labour and materials bond guarantees that you will pay subcontractor and labourers, as well as for materials relating to the project. Therefore, should a subcontractor come back to the project owner to say they were not compensated accordingly, the bond would provide such payment.
These bonds are put in place to ensure the bidding process is fair and equitable (no after the fact surprises on pricing), the job gets done as described and all parties are paid accordingly. This system provides the backbone of contract work and project owners will look to have these assurances that bonds can provide when beginning a large project.
Why is a contract surety bond important?
A contract surety bond will relieve the project owner of the risk of financial loss if there is a failure on the part of the contractor to complete their obligations. This can be the case for many reasons but the more common reasons are:
- Inadequate job costing or project management systems
- Changes to key personnel that impact the progress of the project
- Changes to business strategy that impact work in progress
- Too much growth too quickly, putting pressure on financial and human resources
- The project was out of scope for the contractor
Labour and materials problems
- Shortage of labour to complete the project
- Material changes to the cost of input products due to scarcity, tariffs, etc.
- Unrecoverable cost escalations
- Severe weather causing delays
- Unexpected economic failures
- Changes in the job site conditions
- Death, illness or departure of key employees
- Labour shortages or difficulties
- Difficult contract terms or working environment
Any one of these factors can cause a delay in meeting contractual obligations within the agreed upon scope. A contract surety bond offers financial protection for third parties for any of these types of problems that can come up.
How does a contractor qualify for a bond?
Bond issuance is based on many factors but in short, a good relationship between you, the contractor, the bonding company and your insurance broker is vital to being able to continue with large scale projects. Most companies will need to “prequalify” for bonding so that when the perfect job comes available, they can enter into a bid quickly with confidence in their ability to perform the work. Going through prequalification for bonding can ensure you have a full handle on the KPI’s that drive your business forward, such as:
- Capacity to perform tasks
- Financial strength
- Company history
- Organizational structure
- Continuation plans
- Current work in progress
- Good character
- Experience in matching contract obligations
- Financial stability
- Good credit history
- Solid banking relationship
- Line of credit
- Has equipment and resources to carry out the contract
To learn more about contract surety bonds, talk to our commercial services team to gain more information.