Author, Andy Roberts, Account Executive, Surety Division, Rancho Mesa Insurance Services, Inc.
When we have clients that are required to bond for the first time, often their first questions are what is a surety bond, how do they work, and why am I being required to provide one.
In its basic form, a surety bond is a three party agreement between the contractor, called the principal, the project owner, called the obligee, and the surety company. The surety company provides a financial guarantee to the obligee that the principal is both qualified and capable of performing the contracted job.
It is important to note, that while surety is an insurance product, it doesn’t function in the same way that traditional insurance does. Unlike insurance, which protects who obtains it, surety bonds are put in place for the benefit, or protection, of the obligee. As mentioned previously, the bond provides financial assurance to the obligee that the contractor is qualified and capable of completing the job per the terms stipulated in the contract. If the contractor were to default, the surety would be responsible for stepping in and making sure the project gets finished.
When and Why Are Surety Bonds Required?
Surety bonds are required on most public works projects that are led by federal, state, or local government agencies due to the Miller Act, which was passed in 1935. The Miller Act is designed to protect tax payer dollars, by requiring performance and payment bonds on all federal projects in excess of $150,000 and payment bonds for federal contracts between $35,000 and $150,000. Most states have similar legislation, known as “Little Miller Acts,” although the bond threshold varies from state to state. In addition to these jobs that require bonding, an increasing number of private owners and construction lenders are requiring surety bonds as well, in order to provide protection on their private jobs.
This article serves as a basic overview of performance and payment bonds, what they do, and why they are required on certain jobs. For additional information about these topics or additional information about the process of getting bonding for a job, please contact us at (619) 937-0166.
Additionally, we will be hosting a webinar, “Surety 101: Bond Basics” on August 27, 2019. I will dive deeper into the different types of contract and commercial bonds that are often required of contractors, and also the process of what is needed in order to get a surety bond program established with a surety.