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.
- 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.
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.