Bonds and Bonding – How to get a bond
A bond guarantees payment for losses caused by failure to uphold a contract, perform work or dishonesty. Bonds can refer to financial investments or insurance transactions. The insurances industry deals in surety bonds. A surety bond acts as a guarantee issued by a third party, the surety, to pay one party, the obligee, a specified amount of money should another party, the principal, fail to meet its obligations. The surety vouches for the principal and protects the obligee against loss. In exchange, the principal pays a premium to the surety, relying on the surety’s financial strength to uphold the contractual agreement.
The most common surety bonds include:
- Bid Bonds
- Performance Bonds
- Prepayment Bonds
- Retention Bonds
Qualifications
A surety qualifies a company based on financial strength and industry experience. A rigorous prequalification investigation inspects the contractor’s business operations, reputation and references, ability to meet obligations, equipment available to perform the work, credit history and relationships with banks and other financial institutions. Companies with less experience can still qualify for a bond, but may pay higher premiums as the risk of loss increases. As a rule, a company must run a well-managed, profitable enterprise in order to receive a surety bond.
Bond Rate
Like Commercial General Liability Insurance, bond premiums vary from one surety to another and range between 0.5-2 percent of the contract amount. The size, type and duration of the project also influence the bond rate. As a business practice, contractors typically include the cost of the performance bond in the project contract and pay the premium before the bond takes effect. If the contract changes, the premium adjusts, and the contractor pays the additional amount due to continue the bond.
Bond Benefits
A surety bond persuades a company to contract with the principal by demonstrating credibility and guaranteeing performance of contractual obligations. The principal has proven itself capable of fulfilling obligations and is a qualified credit risk. An obligee has a guarantee that work will be completed. Subcontractors no longer need to issue liens to prevent non-payment for goods or services. Surety bonds minimize risks for all contractual parties.
