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TIS Insurance Services

Surety Bond Basics

Construction represents about 6.0% of the U.S. Gross Domestic Product, according to the Center for Economic and Policy Research. This $975 billion industry is composed of nearly 798,000 construction companies and 6.2 million workers. According to Biz-Miner, about one in five contractors fails. Contract surety bonds serve to protect the project owner against contractor failure.

A surety bond is a three party agreement where the surety company assures the obligee (owner) that the principal (contractor) will perform a contract. Surety bonds used in construction are called contract   surety bonds.

There are three main types of contract surety bonds. The bid bond assures that the bid has been submitted in good faith, that the contractor intends to enter the contract at the price bid and provide the required performance and payment bonds. The performance bond protects the owner from financial loss in the event that the contractor fails to perform the contract in accordance with its terms and conditions. The payment bond assures that the contractor will pay certain workers, subcontractors, and materials suppliers.

Each surety company has its own individual underwriting standards and requirements but there are shared fundamentals common to all underwriting. The surety companies will look to bond contractors that meet the following criteria.

• A good reputation and references;
• Experience matching the contract requirements;
• The necessary equipment and manpower to do the work or the ability to obtain it;
• The financial strength to support the desired work program;
• An excellent credit history; and
• An established bank relationship and line of credit.

Surety companies and surety bond producers have been evaluating contractor and subcontractor performance for over a century. Their expertise, experience, and objectivity in prequalifying contractors is one of a bond’s most valuable attributes. Chad Martin, Bond Manager for TIS Insurance Services, states “that a professional contract bond producer is a key to suretyship and can make a difference when it comes to the approval or declination of bond request, program size and levels of communication.”

Chad suggests that to find a producer who specializes in contract surety bonding, contact the National Association of Surety Bond Producers (NASBP) at (202) 686-3700 or www.nasbp.org. NASBP members adhere to a code of professional standards and have a reputation for integrity within the surety and construction industry.

4 thoughts on “Surety Bond Basics”
  1. check says:

    pretty helpful stuff, overall I imagine this is really worth a bookmark, thanks

  2. Surety bonds have always been a little confusing to me, but this article was very helpful in understanding the basics and purpose of bonds. I didn’t realize that payment bonds are there to assure that the contractor fulfills certain payments with workers, subcontractors, and suppliers, as you mentioned. These are definitely a great way to help companies reduce financial risk when going into a project. Thanks for sharing!

  3. It’s interesting to learn more about surety bonds. If I were hiring a contractor for a remodel or something, I’d definitely look at this. So, what bond out of the three would I want to look for?

    1. tisinsurance says:

      Mr. Fitzgerald, someone from our Surety Bond Division will be in touch with you very soon.

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