What Is a Surety Bond...
You wouldn’t drive a car without adequate insurance. You shouldn’t run a business without a surety bond if you need it. A surety bond acts as a guarantee to third parties, usually promising that you will do what you say (e.g. complete a job when scheduled).
There are different types of surety bonds, including:
Bid bonds – if you bid on contracts, this type of bond assures the party requesting the bids that you will execute the contract if you are the lowest bidder and win the contract; if you fail to execute the contract, the amount of the bond goes to the other party. Typically, bid bonds run about 10% of the contract amount and are usually required for all public sector projects as well as some private projects.
Dishonesty bonds (also called fidelity bonds) – these protect third parties from the dishonest acts of your employees. Typically, these bonds are carried by cleaning companies to provide protection to customers against employee theft. They provide blanket coverage for all employees, regardless of number or the hours they work.
License bonds - typically, licensed contractors are required to post a bond guaranteeing that they can perform certain types of work within set parameters.
Performance bonds - these guarantee that you will complete the work as promised. If you were required to post a bid bond, expect to need a performance bond (usually within 30 days of the contract award). The cost of the bond depends on the contract price, type of work involved and your background. Typically, a bond’s premium can range from 1% to 4% of the contract price.
Payment (or final) bonds - these guarantee that everyone supplying labor and materials to a project will be paid. Typically they are part and parcel of performance bonds and are included in their cost; it is very rare that a payment-only bond is required.
How to obtain a surety bond
A surety bond is issue by a surety company, which functions much like an insurance company. It assesses the probability of your being able to fulfill your obligations so that it will not be called upon to pay out to third parties.
Typically, you must provide three years of financial statements showing work-in-progress, accounts payable, accounts receivable and bank references. There may be simplified applications for bonds under $100.000.
Are you having difficulty obtaining a bond because you’ve only been in business a short time or for some other reason? Check out the Small Business Administration’s Office of Surety Guarantees (www.sba.gov/osg). While the SBA does not issue bonds directly, it provides a guarantee for bid, performance and payment bonds. Contracts up to $2 million can qualify for the SBA bond guarantee.
