How surety bonds work

The bond is an agreement between three parties: the principal, the surety and the obligee.

A surety bond offers a guarantee from a third party (the guarantor or surety) to a beneficiary (the obligee) that an agreed sum of money will be payable to the beneficiary in the event that a company (the principal or supplier) fails to deliver on its contractual obligations. 

The obligee may require the principal to take out the surety bond as a form of protection. The surety bond protects the obligee from violations of contracts or unethical business practices; it assures that the work will be completed based on the contract. The surety company becomes responsible for the contract, obligation or debt.

Surety bonds are used as a guarantee against unforeseen financial challenges that may arise with the principal. 

Types of surety bonds

There are two types of surety bond available.

1. Contract bonds: these secure performance and contract related obligations without the need to provide financial or collateral based security.
2. Commercial bonds: they cover other types of bond that fall outside the scope of contract bonds.

Surety bonds can be used for assurance in projects, terms of commercial licences or permits and to guarantee payments.

Benefits of surety bonds for business

• Increase client confidence: with a surety bond in place, there is a contractual and financial guarantee that the project will be delivered as expected.
• Demonstrates your commitment to a project, and your capability to deliver, your ability to win tenders is enhanced.
• They provide assurance to subcontractors that they will get work and be paid for it.
• They are often mandatory for large-scale projects.

Benefits of surety bonds for project managers

A clear benefit is the involvement of the guarantor or surety. As part of the underwriting process, we carry out thorough risk analysis of the company we are going to guarantee. We carefully check our contractors and then work with them to meet obligations within a given timeframe.

• We pre-qualify our contractors, to the obligees or corporation wanting work carried out.
• We guarantee the original bid: everything from workmanship to materials, costs to timelines.
• If work is not completed to an agreed standard, or faults occur within a set period, we provide an opportunity for contractors to rectify any issues.
• Our involvement encourages timeliness and performance.

Surety bonds support industry standards by offering customers a way of making sure companies provide high standards of goods and services.

We have dedicated specialists in the surety market as well as international capabilities through our parent company Gallagher.  This gives us a wide international representation, buying power and a distinct edge in delivering value to our clients. We offer industry leading expertise in the provision of both contract and commercial surety bonds.

Contact one of our construction specialist broker today to learn more about bonds or more cover options for construction projects.