More About Surety Bonds: Compliance Gaurartee
When property owners want to be sure about a project being completed, a service being performed or a product being delivered they may require a Surety Bond. Why? A Surety Bond is a kind of financial assurance that when a contractor, engineer or manufacturer is unable to perform according to a contract that there are financial assurances in order to find alternative providers to complete the contracted task. While this is typically utilized for larger projects, it may also be required for residential projects. Surety Bonds can also be used as a marketing and/or sales tool to assure potential clients of a project’s completion or service fulfillment.
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What Is a Surety Bond?
A Surety Bond is a contract between three parties – The Principal (you or the company), The Surety (the company providing the assurance) and The Obligee (the entity requiring the bond e.g. city, state, customer, organization). The SURETY financially guarantees to an OBLIGEE that the PRINCIPAL will act in accordance with the terms established by the bond.
PRINCIPAL = the party that is covered and who is obligated to fulfill the terms of a contract.
OBLIGEE = the party that is requesting the guarantee
SURETY = the party that issues the bond
There are many different types of Surety Bonds for the different fields of business, industries or professions. Regardless, of the application the function is the same – IF the Principal fails to comply with the agreed-upon terms, the Obligee could then file a claim to the bond. The Surety is then obligated to pay the proceeds of the claim to the Obligee to cover legitimate losses.
How are Surety Bonds used in the Construction Industry?
There are many types of Surety Bonds that are used. Below is a list of some of the most commonly required bonds:
CONTRACT BONDS also referred to as construction bonds, guarantee that the project will be completed according to the agreed-to terms of the contract. When the contractor does not complete the project according to the terms of the contract, the developer (Obligee) can file a claim to cover their financial losses.
COMMERCIAL BONDS are designed to protect the public against financial losses, and safeguard against fraud. Below is a list of commonly required bonds: License and Permit Bonds, Public Official Bonds, Notary Bonds, Fiduciary Bonds, Wage and Welfare Bonds, Utility Bonds, Hazardous Waste Removal Bonds and many more!
BID BONDS are commonly combined with PERFORMANCE BONDS to ensure the completion of a project.
PAYMENT / PERFORMANCE BONDS are commonly required for federal, state and commercial construction projects to ensure that the suppliers, subcontractors and laborers will be compensated.
Why Would a Business Need to Have a Surety Bond?
In the previous examples, Surety Bonds were used as a type of protection.
All businesses can also use Surety Bonds as a competitive advantage when soliciting contracts. What is the advantage? There is an additional level of assurance that the project will be completed according to the terms of the contract. Also, when government agencies hire contractors, they typically require the company performing the work to provide a Surety Bond. When security is an issue, a company may also be required to provide a Fidelity Bond which covers them in the event of fraud, theft or embezzlement.
There are also federal and state requirements that mandate Surety Bonds for specific industries. Licensing and Permit Bonds are used to assure a client that you or the company will perform your job ethically, in accordance with state and federal standards as well as applicable rules within your profession. Since laws and regulations vary, we highly recommend researching the specific laws for your state or states in connection with licensing and permitting.
To ensure that the process run as smoothly as possible, we recommend fulfilling the basic requirements as explained by our expert well in advance of any specific need.
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