We have a guest blogger today. His name is Vic Lance, owner of Lance Surety Bonds.
By Vic Lance:
Starting a new construction project requires endless amounts of legal documentation and working through the proverbial “red tape.” Most often one of the starting points for beginning a construction project is to acquire at least one (typically two) contractor bonds, also known as surety bonds. Even though they are required on virtually all projects, much is still unknown about what they do, how they came to fruition and how much they cost. The following is an inside look at the most common questions regarding surety bonding:
Why are surety bond required?
The history of surety began around 1935 with the passage of the Miller Act. This law required both performance bonds and payment bonds on federal construction projects costing more than $100,000. Following this, several states adopted their own regulations which were deemed “Little Miller Acts.” Because of this, surety laws can vary widely from one region to another.
What is a surety bond?
In simple terms, surety bonds are a form of a contract. They promise that work will be completed per agreed upon terms and payments will be given to subcontractors and material suppliers.
In all cases, surety bonds are an agreement involving three parties:
- Obligee – the project owner
- Principal – the bond purchaser or bond owner
- Surety – the agency selling the bond and overseeing work is performed per the bond’s protections
How much does a surety bond cost?
There is not one set fee associated with surety bonds. Rather, premiums and prices range depending on the applicant’s credit history, the type of bond being purchased and the geographic region the bond is required in. Applicants with almost flawless financial backgrounds will be granted the most competitive rates. Those with less than average credit history can also apply through several organizations high-risk bond programs. On average the lowest rates offered are between 1 and 3 percent, while bad-credit individuals may pay anywhere between 5 to 20 percent of the contract amount.
How do contract bonds and construction bonds differ?
The simple answer to this is, there is no difference between the two bonds. In fact, these are simple nicknames or terms used interchangeably to refer to various types of contractor surety bonds. The most common types of contract surety bonds are bid bonds, performance bonds and payment bonds, which are often sold together.
- Payment Bonds: these ensure that all parties who should be compensated will be even in the event of a contract default
- Performance Bonds: these protect project owners from contractor negligence if work is not performed to the agreed upon statements in the contract
How do surety bond differ from insurance?
The biggest difference between bonds and insurance is due to risk assessment. For insurance most of the risk associated with protecting a client lies with the insurance agency. On the other hand, bonds are issued under the expectation a claim will never have to be filed. If however a principal is found to be in violation of his/her bond protections, the surety agency will pay reparations to the claimant and then seek reimbursement from the bond purchaser. Due to this, risk always lies on the side of the principal – the bond owner.
Vic Lance (firstname.lastname@example.org) is the owner of Lance Surety Bonds a nationwide surety agency. He helps advise contractors and small businesses on the bonding process.