As a general or subcontractor, you’re often asked to secure surety bonds or surety insurance by clients – and if you work on a public project, it will likely be a requirement to have.
If you’re not sure what surety bonds are or how they work or what they are, let us explain:
There are two types of Surety Bonds, Contract Bonds aka, Construction Bonds and Commercial Bonds
With all bonds, there is a three party relationship:
- Obligee: Entity requesting a bond, typically an owner and/or government body.
- Principal: Entity that is responsible for fulfilling the obligation the bond guarantees, typically a contractor or licence/permit holder (your business).
- Surety: Entity that guarantees the bond, typically an insurance/bonding company.
Traditionally, when you, the “Principal”, take on a significant size job, you are required to put some sort of a collateral, usually a large cash deposit or some property, as a guarantee for the party hiring you, the “Obligee,” that the job will be done. If you fail to complete your part of the deal, you lose whatever you put as collateral.
But if you can post a bond, you don’t have to put up any funds as collateral, you have obtained “Surety”. The bond itself acts a guarantee, surety, and it satisfies the ‘bonding requirements’ that the hiring party, Obligee, has. This allows you to have the cash flow necessary to get the job done.
In your initial agreement with a bond provider to back you up for the jobs you do, they agree to offer a bond, which is either piece of paper or electronic (E-Bonding) and then you take that document and provide it to whoever that requires it.