Bonding Overview

Surety bonds are risk transfer mechanisms that protect project owners from financial and contractual risks by guaranteeing the contractor’s performance in accordance with project contracts.

Bond Types

  • Bid Bonds - Assures that a bid has been submitted in good faith and that the contract will be entered at the price bid.
  • Performance Bonds - Protects the project owner from financial loss when the contractor fails to perform according to the contract terms.
  • Payment Bonds - Assures that the contractor will pay subcontractors, laborers and suppliers.

Obtaining Bonds

Pre-qualification is based on the rigorous and thorough examination of the contractor's business operations. Surety companies are concerned with the following:

  • Capacity – Does the applicant have the skill and ability to perform the obligation?
    • The ability to meet current and future obligations;
    • The experience match the contract requirements;
    • Necessary equipment or the ability to obtain them; and
    • Organization, management plans and continuity plan.
  • Capital – Does the financial condition of the applicant justify approval?
    • Excellent credit history and relationships with banks;
    • Cost control mechanisms;
    • Cash flow, net worth, and working capital; and
    • Annual and interim financial statements.
  • Character – Does the applicant’s record show him/her to be of good character and likely to perform the obligation?
    • Good references and reputation with project owners, subcontractors, suppliers and lenders.

To learn more about surety bonds, visit Surety Association of America.