Read our complete guide to find out everything you need to know about surety bonds for your contracting business.
- What is a surety bond?
- What do surety bonds cover?
- Are surety bonds required?
- How much do surety bonds cost?
- How do I get surety bonds?
What is a surety bond?
A surety bond is a guarantee an insurance company makes to a client that a contractor will successfully complete his or her contractual obligations to the client. A surety bond always involves, at a minimum, three parties:
- The obligee: the recipient of an obligation, or as an example, your client receiving services from your contracting business
- The principal: the party who fulfills the obligation, or as an example, your contracting business
- The surety: the party who guarantees the obligee that the principal will fulfill his obligation, or as an example, your insurance provider
What do surety bonds cover?
With a surety bond, your company makes a payment to the insurance company and in return for this payment, the insurance company guarantees to the client that the work will be performed according to the contract. If your company is unable to complete the job as required by the contract, the client can file a claim to recover losses, which the insurance company is obligated to cover.
Are surety bonds required?
As a contractor, you only need to purchase a surety bond if it is required by your client or a governmental body.
You may be required to purchase a surety bond in the following situations:
- When bidding on government construction jobs, some federal, state, and local governments may require your company to purchase surety bonds.
- Some private owners, banks, and general contractors may require surety bonds.
- Some states require a surety bond in order to receive a business license as a contractor.
How much do surety bonds cost?
The cost of a surety bond depends on a number of factors, including:
- Type of bond
- Bond amount
- State you’re located in
- Personal credit score
- Financial health of your business
- Experience in the industry
Surety bond premiums generally fall between one and ten percent of the total bond amount. Much of the pricing of a surety bond depends on your personal credit score, where lower credit scores correlate with higher premium percentages.
How do I get surety bonds?
There are many factors to consider when purchasing surety bonds—from the financial strength of an insurer to the pricing that you’re offered. Surety bonds are unique to the project, business, and individual business owner, so it is particularly important to select an insurance provider that can provide the right bond to fit your project needs.
When selecting an insurance company, there are three main factors you should look at:
- The financial strength of the insurer
- Reputation for customer service
» Learn more about how to get surety bonds