1. A surety bond is an instrument under which a surety guarantees to fulfill the obligations of one party to a second party if the first party fails to perform the obligations.
2. Construction 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.
3. Over the years, surety companies have paid billions of dollars because of contractor failure on bonded projects. Without bonding, these costs would have been borne by the owners of the projects.
4. Federal 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 that amount. Each state has its own laws requiring bonds on public works known as Little Miller Acts.
5. There are three types of contract bonds: the bid, performance, and payment bond. They protect the taxpayer 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.
6. Surety bonds are being required more often by owners of private building projects to protect the owners and stakeholders from the enormous costs of contractor failure.
7. Surety bonds, through its rigorous pre-qualification 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.
8. Bonds help screen out unqualified contractors and give the assurance that the contractor, awarded the project through a competitive bid or other awarding methods, is able to perform the job. Reputable contractors will not object to providing surety bonds.
9. The costs for bonds vary, but generally are one to three percent of the contract amount. On very large projects, the cost can be less than one percent.
10. To bond a project the owner merely includes the bonding requirement in the plans and specifications for the project.