What is a Surety Bond? – SFAA (2024)

Contract surety bonds are primarily used in the construction industry and may be required by the government or private developer of a construction project to ensure the contractor is qualified and able to complete a project in a timely manner. The contract surety bond also ensures the contractor will pay all subcontractors, suppliers and other workers to complete the project. The three types of contract surety bonds are – a bid bond, a performance bond and a payment bond. Federal and state construction projects generally require a contract surety bond.

Commercial surety bonds protect the public (consumers) against fraud, misrepresentation and financial risk and are typically required by federal courts, government bodies, financial institutions and private corporations as part of a company’s licensing processes. Examples include license and permit bonds, court bonds, fiduciary bonds, and more.

Includes bid or proposal bonds, performance bonds, payment or labor and material bonds, maintenance bonds and supply bonds. These bonds are required by state or federal law for most public construction projects or by a private developer.

This type of bond is given by a Court Fiduciary to secure the faithful performance of fiduciaries’ duties and compliance with the orders of the court having jurisdiction. Typical bonds within this category include bonds for Administrators, Executors, Guardians, Trustees Under Will, Liquidators, Receivers and Masters.

This type of bond is required when litigants seek to avail themselves of privileges or remedies that are allowed by law only upon condition that a bond with surety be furnished for the protection of the opposing litigant or other interested party. Typical bonds within this category include bonds for Injunction, Appeal, Indemnity to Sheriff, Mechanic’s Lien, Attachment, Replevin and Admiralty.

This category consists of any bond required by state law, municipal ordinance, regulation, and in some instances, the federal government or its agencies, to obtain a license to engage in a particular business or a permit to exercise a particular privilege. In general, the terms “License” and “Permit” are used interchangeably. Typical bonds within this category include Contractors’ License Bonds, Motor Vehicle Dealer Bonds, Securities Dealers’ Blue Sky Bonds, Employment Agency Bonds, Health Spa Bonds, Grain Warehouse Bonds, Liquor Bonds, Cigarette Tax Bonds, and Sales Tax Bonds.

This type of bond guarantees the faithful performance of duty by a public official in a position of trust. These bonds are required to secure compliance with federal or state statutes and, therefore, guarantee whatever liability the statute imposes. Typical bonds within this category include bonds for Gubernatorial Appointees, Treasurers, Tax Collectors, Sheriffs, Constables, Judges, Court Clerks, and Notaries.

Various agencies of the federal government require or accept surety bonds for a number of different obligations, such as Medicare and Medicaid Provider Bonds, Immigrant Bonds, Excise Bonds, Customs Bonds and Alcoholic Beverage Bonds.

This category includes other types of bonds that do not fall into the categories outlined above, such as Lost Securities Bonds, Lease Bonds, Bonds to Guarantee Payment of Utility Bills or Return of Borrowed Property, Bonds to Guarantee Employer Contributions for Union Fringe Benefits and Workers’ Compensation Bonds for Self-Insurers.

Surety companies conduct an extensive underwriting process to prequalify a contractor for a construction contract surety bond. This thorough vetting helps government agencies and private owners/developers make the right decisions when hiring a contractor for a project.

A contract surety bond gives the government agencies or private owners/developers a contingency plan should the contractor default on the project. This can include the surety company giving the contractor technical or financial support, hiring a replacement contractor, re-bidding of the contract, or paying the full amount of the bond to the oblige.

Bankruptcy filings have serious implications for government agencies and taxpayers, however if a contractor failure does happen, the surety company is responsible for the solution – not the government or taxpayer.

A contract construction surety bond guarantees that covered subcontractors, suppliers and laborers on the job will get paid.

Bonding allows states and localities to consider innovative project procurement methods, such as public-private partnerships (P3s), because the surety company provides critical security if something goes wrong.

A good contract surety bond insurance company r and producer can be two of a contractor’s greatest assets. The producer and insurance company possess or have access to a wide variety of resources to assist contractors.