Surety Bonds: Things that You Need to Know!

Making optimal decisions to reduce and mitigate risk on construction projects and choosing the most cost-effective option to ensure project completion on time are critical to a successful project – and a good company.

Taking a chance on a contractor or subcontractor whose degree of dedication is unknown or who could go bankrupt halfway through the project can be financially disastrous. Surety bonds are the best choice for project owners who want financial protection and construction assurance. They guarantee that contractors will complete the job and pay required subcontractors, laborers, and material suppliers.

A surety bond is a three-party agreement in which the surety corporation guarantees that the principal (contractor) can complete the contract. When surety bonds are used in construction, they are regarded as contract surety bonds.

Contract surety bonds are divided into three categories.

  • The bid bond guarantees that the bid is submitted in good conscience, that the contractor expects to enter the contract at a price offered, and will issue the required performance and payment bonds.
  • The performance bond safeguards the owner from financial liability if the contractor fails to fulfill the contract’s terms and conditions.
  • The payment bond ensures that the contractor will pay such staff, subcontractors, and supply suppliers.

Several surety companies are insurance company branches or divisions, and state insurance departments control both surety bonds and standard insurance plans as risk transfer mechanisms. On the other hand, traditional insurance is intended to reimburse the insured in the case of unexpected adverse incidents. The insurance premium is calculated actuarially based on the total premiums paid and the estimated losses.

Surety bond premiums differ from one surety to the next, but they can range from 0.5 percent to 3% of the contract value, based on the project’s size, form, and length, as well as the contractor. An offer bond typically does not have a direct cost attached to it. Payment bonds and maintenance bonds are also used in performance bonds.

Defaulting contractors is an unfortunate but often inevitable occurrence. The owner must legally declare the contractor in default if the contractor fails. Before settling any lawsuit, the surety conducts an independent inquiry. It safeguards the contractor’s legal rights if the owner declares the contractor in default without authority.

When a suitable default occurs, the surety’s options are frequently set out in the bond. These choices may include the right to rebid the job, bring in a new contractor, offer financial and technical assistance to the original contractor, or pay the bond penalty amount.

The contractor must secure bonds as they are stated in the contract documents. The bond premium is usually included in the contractor’s bid, and the premium is usually paid when the bond is executed. If the contract sum increases, the premium will be adjusted to reflect the rise in the contract price.

Contract surety bonds are a smart investment because they include eligible contractors while also shielding public and private owners, as well as prime contractors, from the potentially crippling costs of contractor and subcontractor failure.


Many contractors must post a surety bond before beginning work on a project. At Leos Auto Insurance there are surety bonds to cover project owners even if a contractor fails to complete their project according to the contract’s terms. A contractor will bid on projects after obtaining a surety bond and assure the project owner that they will be financially protected.