- A surety
bond is an instrument under which one party guarantees to another
that a third will perform a contract.
is a very risky business and each year many contractors, large
and small alike, fail before they complete their projects or pay
their subcontractors or suppliers. Over the years, surety companies
have paid billions of dollars because of contractor failure on
- These costs
would have been borne by the owners of the projects without bonding.
law (the Miller Act) mandates surety bonds for all public works
contracts in excess of $100,000. Federal procurement officials
may, at their own discretion, require bonds on projects below
- There are
three types of bonds: the bid, performance, and payment bond.
They protect the owner by guaranteeing that the contractor is
able to enter into the contract, perform the work on time and
according to the contract and that certain workers, subcontractors
and suppliers will be paid.
- Surety bonds
are being required more often by owners and financial institutions
on private building projects to protect their company and shareholders
from the enormous costs of contractor failure.
- Surety bonds,
through its rigorous prequalification of contractors, protects
the owner and benefits the lender, the architect and everyone
else involved with the project by evaluating whether the contractor
is able to translate the project's plans into a finished project.
- Bonds help
screen out unqualified contractors and gives the assurance that
the contractor, awarded the project through a competitive bid
or other awarding method, is able to perform the job. Reputable
contractors will not object to providing surety bonds. The bond
cost is minimal compared to the contract value and peace of mind
- The cost
for bonds varies, but generally is one to three percent of the
contract amount. On very large projects, the cost can average
less than one percent.