Surety Bonds 101
Surety Bonds can be confusing if your firm is not familiar with the surety process. Most commercial contractors will need Bid Bonds and or Performance & Payment Bonds when working on Public or some Private projects. There are several surety bond options available to contractors depending on the contract size, your firm’s financial strength, and the experience you have in the field. Below is a brief overview of what a surety bond is, the difference between a Bid Bond and Performance & Payment Bond, and how the SBA program can help those firms who have difficulties meeting the standard surety requirements.
What is a Surety Bond?
Surety Bond is a 3 party agreement where the Surety assures the project owner (obligee) that the contractor (principal) will perform a contract and pay your subcontractors and suppliers. The surety expects the contractor to perform its contractual obligations under the bond. As part of the surety program, your firm and owners will sign an Indemnity Agreement. The Indemnity Agreement obligates your firm and the owners individually to protect the surety company from any loss cause by your firm’s failure to fulfill the contract obligation.
What is a Bid Bond?
A Bid Bond provides that a bid submitted by the contractor is issued in good faith and that the contractor will provide the required Performance and Payment Bonds if they are awarded the contract. Should the contractor back out of the bid after being awarded the job, they may be subject to the bid bond penalty listed on the bond.
What is a Performance & Payment Bond?
Most public contracts require Performance & Payment bonds. A Performance Bond provides to the owner a guarantee that you will perform the contract. A Payment Bond provides to the owner a guarantee that you will pay all the subcontractors and suppliers on the job.
What is the SBA Program?
The SBA provides an additional guarantee on surety bonds to the surety companies. This allows the surety companies to offer bonds to small businesses that might not meet the standard financial criteria needed to offer a bond.
The SBA’s Mission is to provide surety bond guarantees in direct partnership with approved surety companies and agents, to allow small businesses to obtain Bid, Performance and Payment Bonds when they are not available from a standard surety.
The SBA may be a good option for contractors who:
• May have lower Working Capital
• Has a Bank Line of Credit available to use
• And can produce Internal financials
The SBA charges a percentage fee of the contract price in addition to the bond premium charged by the surety company. The SBA does not charge a fee for bid bond guarantees.
Can we be of help?
The Hartwell Corporation has over 50 years of experience working with surety bonds. We have many standard surety companies available and can help navigate which company is the best fit for your firm. If standard markets are not an option, we are set up with The Cincinnati Insurance Company as the SBA surety bond partner. Please contact us today for more information.