Suretyship: A practical guide to Surety Bonding

Surety represents a guarantee offered by third-party, which guarantees that services certain contractor offers will be done in timely manner and in full accordance to contract between contractor and an obligee. In United States, this types of guarantees are usually sold in the form of bonds, by surety companies and are required in most contracts, which worth more than $150,000 (although the surety bonds’ requirements vary from one state to another) or for starting most types of service oriented businesses.

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Which surety bonds to choose?

Surety companies offer wide variety of different surety bonds. Most common surety bonds’ classification clearly separates bonds that are required for starting a business, which are called license surety bonds, and in which general public represents an obligee. There are also contractor bonds that are bought for each contract or project phase separately. All other types of surety bonds are classified under ‘Commercial surety bonds’ category.

Main surety bonds’ categories can also be divided in several categories, depending on contractor’s business or the phase of the project they cover. Some types of license surety bonds are:

• Auto Dealer bonds – surety bonds required for starting a car dealership;
• Contractor bonds – type of surety bonds required for starting a contractor’s business (they shouldn’t be mixed with contract surety bonds);
• Travel agent bonds – bonds required for founding a travel agency, or any other type of business associated with selling or reselling vacation packages;

While type of license surety bonds mainly depends on contractor’s industry, contractor bonds’ type mainly depends on the phase of contractor project they cover, there are:

• Bid bonds- allow contractors to bid on projects and protect public interest;
• Performance bonds – cover the work performed by contractors after getting the job;
• Payment bonds – ensure that all laborers, suppliers and sub-contractors get paid;
• Maintenance bonds – are made for projects that require warranty;
• Supply bonds – cover the project which oblige contractors to deliver the necessary materials;

Commercial bonds as we said earlier represent all other types of surety companies usually offer. Some of these are:

• Fidelity bonds – protect employers and the public from employee theft and other wrong-doings;
• Court bonds – guarantee that court orders will be executed;

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What to prepare

Process of obtaining surety bonds in much simpler in digital age. However there are still some requirements contractors need to satisfy to guarantee surety for their work. Before starting the process, we recommend contractors to:

• Check their credit report – high credit rate provides better surety rates;
• Prepare business documentation – surety companies usually check wide variety of company’s documents and need to check: company’s financial information, number of employees, state licenses contractor has, etc.;
• Choose a surety agent (company) – various companies offer different types of bonds and rates, therefore contractors need to choose the ones that offer the best conditions;
• Prepare right amount of money – paying in full, up front, secure best surety rates. Of course there are usually other payment plans on the offer. Price of bonds can be calculated online, using JW Surety Bonds’ Premium Calculator;

What if… God forbid…

When buying surety bonds most contractors fear claims that might occur in case they are not able to finish the project in time, or in accordance to the contract. Claims occur if contractors don’t fulfill obligations of their bond and avoiding them might hurt contractor’s reputation and put its whole business at stake. Surety agents usually offer contractors various types of legal help and represent first line of defense for contractor against claims. If claims do occur contractors need to pay them in full, including legal fees, but even this is much better option than paying capital claims directly to obligee or putting your business reputation at stake.

Buying surety bonds protects obligees interest and in the same time it protects contractors from capital claims that might occur, and enables them to use all of their funds while working on the project. This makes surety bonds a preferable guarantee by both contractors and obligees.

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