|
|
Summary:
A surety bond
is a guarantee from a surety bonding agency that a contractor will complete an
agreement; you will not be liable if the contractor does not complete the
agreement. When choosing a surety bonding company, you need to take into
consideration its reputation, experience and bonding process. |
|
|
What should I consider when
choosing a surety bonding company?
A surety bond is a three-party agreement between a surety company, an
owner (obligee) and a principle (contractor). In this type of bond, the surety
company insures the obligee that the principle will fulfill a contract. When a
surety bond is used in the construction industry, it is called a contract
surety bond. Business owners acquire surety bonds because they want to be sure
that a contract is going to manage his enterprise well, deal fairly, perform
obligations in a timely manner and keep promises. Business owners also pursue
surety bonds because they provide protection in case the contractor defaults on
the contract.
Surety bonding is considered a part of the insurance industry, but it shares
some characteristics with the bank credit industry. However, the surety
company's primary duty is not to lend the contractor money. Instead, the surety
company uses its financial resources to stand behind, or back, the contractor's
commitment and ability to complete a contract. The surety bond is advantageous
for the business owner because it assures that the contracted work will be
completed, and protection will be provided if it is not. Surety bond companies
charge a premium for prequalifying or underwriting
the contractor. Unlike insurance companies, surety companies do not charge
deductibles based on the probability of loss, because surety companies do not
expect a loss to occur.
Surety bonding companies do extensive research on the contractors that they
bond. They request a list of good references from the contractor, as well as
proof that the contractor has experience fulfilling the requirements of
contracts. Surety bond companies will also evaluate a contractor's ability to
obtain equipment necessary to carry out work, the contractor's financial
ability to hire necessary employees, the contractor's credit history and the
contractor's current bank relationships and lines of credit. Having this
information will allows you, as a business owner, to
make a good decision in hiring a contractor. A surety bond will also help
convince architects, lenders and other principles on the project that the
chosen contractor will complete the duties and contracts as assigned.
Because the surety bonding company plays such an important role in assuring
that your contractor will complete his contract, it is important to carefully
consider what bonding company you will choose. If you have never used a surety
bonding company before, it will probably be a good idea to find other small
business owners in your area who have used surety bonding companies and ask
them who they recommend and why. Make a list of these names and do your own
'research'-find out what contractors they bond, and track down other
businesspersons who have used their services.
After compiling a list of potential surety bonding companies, you will want to
check with the U.S. Treasury Department or similar agency in your state to
assure that the agencies are licensed for bonding. Some bonding agencies are
contained within larger insurance agencies, so you will also want to find out
if they have an agent to handle surety bonds specifically or if they use any
agent available to draft surety bonds.
It is also important to ask your surety bonding agency what screening they
perform on contractors. Do they conduct background
checks? Do they gather business reference? What is the upper monetary limit of
their bonding services? How long have they been in the bonding business? What
are their policies if contractors default on an agreement? Are they registered
with the state Insurance authorities and/or the federal Treasury Department?
The surety company is the primary risk-taker in the three-way bonding
agreement, and so will want to thoroughly investigate your business plans and
information about your business before bonding a contractor to do work with
you. It is important to provide as much information as you can to the surety
agency so they can properly underwrite the contractor and make sure you are
protected from liability in case the contractor defaults on your agreement.
A good surety bonding agency will charge a premium for underwriting your
contractor and project, and will publish what their premium rates are. If a
surety company does not publish their premiums or rates, you should contact
your state's Insurance office to assure that they are licensed and comply with
all state and federal regulations.
Perhaps the most important thing to remember when choosing a surety bonding
company is ensuring that you have open lines of communication. You need to
choose a surety bonding agent you can talk to about your business concerns-and
the bonding agent needs to be able to listen to you, and address your concerns
to your satisfaction. Again, other businesspersons will likely be very useful
to you in your bonding agency search. You may also want to ask contractors who
have submitted bids to you what surety bonding agencies they have used in the
past.
|
