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.

Different surety needs are met by different types of surety bonds. Surety bonds are a risk transfer mechanism whereby the risk of non-performance by the principal is shifted from the obligee to the surety company. Federal, provincial and local governments often require surety bonds to guarantee that business owners and individuals will comply with various laws protecting public funds. Contract bonds protect taxpayers and private construction owners by guaranteeing that projects will be completed properly, on time and without liens. Many commercial surety bonds protect and secure public funds and private interests.

There is a need to protect taxpayer dollars and private owners’ investment capital. Construction is a very risky business. Many contractors fail every year, leaving behind unfinished private and public construction projects – and billions of dollars in losses. Surety bonds offer the best way to protect against the risk of contractor failure. Essentially, they guarantee a contractor’s performance, assuring that construction projects will be built on time and that certain material suppliers and subcontractors will be paid.

The role of the Surety Agent is to assist the Surety in writing profitable surety business. Typically, the agent maintains the direct contact with the contractor and serves as an intermediary between the contractor and the Surety. The agent usually handles all bid and final bond requests from the contractor and gathers miscellaneous information as requested by the Surety for underwriting purposes. Furthermore, the agent is typically responsible for the processing and delivery of all bid and final bonds.

Ideally, the Surety Company wants to see three years of Reviewed, CPA prepared business financial statements along with Work in Progress Schedules, Accounts Payable and Accounts Receivable Schedules, Company & Contractor Histories, Bank References and thoroughly completed questionnaire (often, surety support is established with less). The Surety Agent’s job is to retrieve this information from the contractor, verify its completeness, evaluate the provided information and submit it to the Surety Company that will best match up with the contractor’s needs and capabilities. As indicated above, a few sureties have a simple single page application for contracts around $100,000 or less. Surety for these small contracts is based solely on the established credit of the applicant.

A Bid Bond is issued by the Surety to the owner of the project in lieu of a required cash deposit. The cash deposit (usually 10% of the bid amount) is subject to full or partial forfeiture if the contractor is the low bidder and fails to either execute the contract or provide the required Performance and/or Payment Bonds. In other words, the bid bond assures and guarantees that should the bidder offer the low bid, the bidder will execute the contract and provide the required surety bonds.

Bondable does not mean that the contractor has a license bond. All Licensed Contractors are Required to post a license bond in order to be Licensed. Bondable Actually means that the Contractor’s capital, character & capacity have been analyzed by a Surety Underwriter. The Surety Underwriter has then determined that the Contractor can perform certain types of work within established parameters. Based upon that determination, the Surety Company will issue Surety Bonds guaranteeing the Contractors performance and/or payments within the resolved guidelines.

It is more difficult, but not impossible, for new companies to secure bonding . In addition to pro forma financial statements, the surety would require personal indemnity of owners and spouses along with some form of collateral. This can be in the form of a certificate of deposit or letter of credit, obtained from your bank, which is held by the surety as security for your bond(s). Once the job is completed and the Owner releases the bond requirement, your collateral can be returned to you from the Surety company.

Bonds provide small contractors with numerous benefits. The surety bond provides protection against contractor default. The surety company helps the contractor avoid costly delays and contract disputes, by intervening before it’s too late. When a project is bonded, there’s also an added layer of payment protection for workers and suppliers of the contractor. Surety bonds help level the playing field, and allow a small contractor to compete in the free market, leading to lucrative contracting opportunities.

A Principal is legally obligated to reimburse the Surety Company for any loss and expense incurred by the Surety. The Principal’s obligation to the Surety can, therefore, be greater than the original obligation to the obligee. The Surety has the same recourse against the Principal as any other creditor would have in recovering their loss. This is the primary difference between a surety bond and insurance.

The Surety’s claim department will conduct an investigation as quickly as possible to avoid any further damages and mitigate their exposure. It is important to note as the Principal under a bond, that a pending claim does not necessarily mean there will be a financial loss incurred since the dispute may not even be legitimate. If the Surety does determine through their examination that the claim is valid, the Principal will be reminded of their obligations under the indemnity agreement and given the opportunity to satisfy the claim first. If the Principal fails to respond, the Surety will arrange settlement with the Obligee, and implement collection proceedings against the Principal.

Once you know what your buyer wants, you need to approach your bank, a surety company, surety broker or insurance broker. A bank will provide a letter of guarantee and a surety company will provide a surety bond. There are pros and cons to both types.

Letters of Guarantee are not cheap. When your bank issues a letter of guarantee, you have to pay a fee to have it issued and your line of credit is debited. This can lead to a cash flow crunch. You are also exposed to extra risks because your buyer can call the guarantee at any time without cause.

Surety bonds don’t cause as much of a cash flow crunch because, only in the most extreme cases, will a surety company demand 100 % cash collateral. As well, buyers will, at times, pay fees associated with a surety bond. On the other hand, these bonds are not as easy to get as bank guarantees.