How Do Contractor Surety Bonds Work?

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Surety bonds are a common type of contract between two parties when an owner hires a contractor to complete a specific project. They are often used in the construction industry, and many larger companies require surety bonds for their projects no matter how well-known the contractor is. Federal and state organizations always make contractors create bonds. These contracts help protect the owner from any problems with the project.

Purpose

Surety bonds are similar to insurance, but insurance companies do not need to pay anyone involved in the contract. They protect the owner from poor contractor decisions. When a contractor signs a surety bond, the bond holds that contractor to either finish the project as specified, or reimburse the owner. The contractor must pay back the owner for all the materials and labor, as well as for the wasted time and the effort of the the owner to find a new contractor.

Parties

There are three parties in a surety bond: the contractor, the owner and the surety agent. The contractor is the person or organization that agrees to complete the work, the owner is the person who requests a specific project to be completed and the surety agent actually creates the surety bond. The agent is typically connected with some type of insurance company and works with the contractor to create a bond agreeable to all parties. The agent also manages important legal changes made between the owner and contractor during work on the project.

Process

An owner requires a surety bond, possibly in the form of a bid bond before the contractor has actually been hired. The contractor typically has a surety agent it is used to working with, that can supply the bond paperwork to be signed. The owner specifies project details, such as the materials to be used and the time frame of the project, along with how much the contractor will be paid at various stages in the project. Both the contractor and owner sign the surety bond, and the contractor begins work. If the project goes well and the owner pays as expected the surety bond will not be used.

Indemnification

Indemnification is the process of fully reimbursing the owner for all materials, labor and time lost on a project the contractor cannot complete. The contractor must be absolutely sure the project is within its scope and abilities before signing. If the owner does claim a problem, the surety agent will inspect the project and make a decision. If indemnification is required, the surety agent will pay the owner and collect the funds from the contractor itself.

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About the Author

Tyler Lacoma has worked as a writer and editor for several years after graduating from George Fox University with a degree in business management and writing/literature. He works on business and technology topics for clients such as Obsessable, EBSCO, Drop.io, The TAC Group, Anaxos, Dynamic Page Solutions and others, specializing in ecology, marketing and modern trends.