Are letters of credit a suitable substitute for surety bonds?

The direct answer is No! Surety bonds offer the best way to guarantee a contractor’s performance. Surety bonds differ considerably from letters of credit even though they are both types of guarantees. In the case of default, the surety bond company has duties and responsibilities to both the contractor and the project owner based on the underlying contract. The surety bond company strives to be equitable to all parties to successfully ensure the completion of projects. This role contrasts sharply with a letter of credit whereby the bank simply pays over a sum of money on demand to the project owner. The bank assumes no role in arranging for completion of the work, and the letter of credit is usually for a smaller amount which is often insufficient to cover all of the project owner’s additional costs in the event of contractor default.