The use of a surety bond protects consumers, employees, and other organizations from business failure.
Surety bonds are agreements between three parties; the obligee, typically a government agency or company that requires a bond, the principal, the person requesting the bond, and the surety, which protects insurance.
If you want to understand more about Surety Bond Applications, you must understand what surety bonds are, when they are used, their purpose, how to get bonded, and the bond application process.
What Is a Surety Bond?
A surety bond is an agreement signed for security reasons. The obligee, in this case, is typically a government agency or company that requires a bond for a project or service.
The principal requests the surety bond, while the surety protects insurance.
If a business fails to fulfill its contract with another party, the third-party is left unprotected. It has no way to recoup losses or expenses against the principal who failed to provide its services. Surety bonds protect these individuals from those business failures.
Main Surety Bond Uses
Surety bonds are agreements between three parties – the obligee, the principal, and the surety. Because they primarily function as a form of protection, there are several cases where they’re used:
Government Projects
Federal, state, and local government agencies require a surety bond for several projects and programs, including public works projects like road construction, job training centers, and healthcare facilities. Some examples of types of projects requiring a surety bond may include: –
Projects Involving Federal Funds
The government’s surety company insures a portion of the money used on federally funded projects. If a project fails, the contractor may be required to pay 20 percent of the original contract price to offset cost overruns or other expenses.
Federal Housing Authority (FHA) Projects
FHA insures lenders against losses due to defaults on home mortgages. Lenders are assured of payment if a business defaults on repayment by requiring a bond for any business making an FHA loan.
Grants
State and federal governments award grants to businesses for various purposes. The government’s surety company also insures grant funds, so there is protection for any organization that awards or administers these grants.
Bid Bonds
A bid bond guarantees that a business will fulfill the terms of a contract. Often, bid bonds are required when more than one business bids on the same project.
Performance Bonds
A performance bond ensures that a business contractor will meet all contractual obligations of its agreement by insuring against failure to perform.
Payment Bonds
A payment bond protects subcontractors and other suppliers from financial loss due to non-payment by the contractor.
How Does Surety Bond Application Work?
Typically, the principal is responsible for obtaining a surety bond. The process of applying for a surety bond works with three distinct steps:
- Estimating Project Costs
- Getting Approved
- Paying Upfront Fees
Here’s how it all comes together:
When the principal decides a surety bond is necessary, they must determine the project’s costs or services. That amount becomes the base for which to estimate their bonding capacity. The cost of surety bonds is calculated as a percentage of coverage, which could be as much as 15 percent.
The principal will either use their financial information to request a surety carrier quote or seek an agent who can help them find the best bond based on their needs and requirements.
Once a quote is given, the principal can either accept it or seek out multiple quotes to find the best possible price for the bond. Not all surety carriers process applications directly – some require an agent to work with them on every surety bond application.
If approved, the surety carrier will require the principal to pay a percentage of the bond amount upfront – usually between one and five percent – as their fee for beginning the agreement. The remaining portion will be due after the work is complete and all obligations under the contract have been fulfilled.
Who Pays for Surety Bonds?
The principal is responsible for paying their surety bond premium, but who pays the amount of the bond itself depends on which type of surety bond they’ve applied for.
Bid Bonds
The principal is responsible for ensuring their bid bond has enough coverage for the contract amount. If they are not awarded the project, there is no further cost or penalty, regardless of whether their bid was high or low.
Performance Bonds
The principal pays the total value of the bond upfront and then pays a fee during the work. This fee is usually one percent for every month that passes until the work is complete.
