Surety Bonds: 3 Things To Know
Posted on: 2 July 2017
Surety bonds help manage financial risk on construction projects by providing financial security through ensuring that your contractor is capable of performing the job and paying subcontractors, material suppliers, and laborers. Without a surety bond, you'd be gambling on the level of commitment and competence of the contractor, which could turn out to be a financial disaster if the contractor fails to complete the project in a timely manner, or fails to pay contractors and suppliers. If you have an upcoming construction project and are new to surety bonds, here's what you need to know:
How it Works
Because many people are unfamiliar with surety bonds, it can be an intimidating process, but it works like this: a surety company -- typically an insurance carrier -- guarantees that a contractor will perform a construction contract based on the terms and conditions of the construction job. If the contractor fails to do so, then you are able to file a claim and recover your financial losses. It's a three-party agreement between yourself, the contractor and the surety company.
Cost
The cost to purchase the surety bond will be a percentage of the full bond amount. The size and terms of your construction project and your credit history are major factors in determining the cost of your surety bond. To give you an idea, the cost can range anywhere from 1 percent to 15 percent of the total bond value. So if you need a $20,000 surety bond and you have excellent credit, you may receive a quote of 1 percent. That means you can purchase the surety bond for $200. If you are quoted 5 percent, then the surety bond will cost you $1,000. Having strong personal credit and a good financial background will help you get the best rate. Contact your surety bond company for a quote.
Filing a Claim
If the contractor fails to adhere to the terms and conditions of the contract, you may have to file a claim. The surety company will pay the claim and then seek reimbursement from the contractor. So essentially, the contractor is responsible for paying the claim. Because surety companies are typically subsidiaries of large insurance carriers, the surety company will take steps to guard against fraudulent claims -- as will the contractor -- which can make the claims process slow and arduous. It's recommended that you obtain a claim advocate to help resolve the claim. Keep in mind that the contractor will likely have a claims advocate as well.
Contact a company like NFP, P & C, Inc. for more information and assistance.
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