What is a Surety Bond?
Think of Surety Bonding as a money-back guarantee. If you’re a developer planning a construction project, surety is the financial guarantee that the construction company will build your development as specified in the contract. If your company is entering into an obligation with a governmental agency or bureau, a private entity, or a federal, provincial, or local court, surety gives that entity piece of mind that you’ll fulfill the obligation as contractually promised. Surety can assist in guaranteeing just about any obligation that your company can find itself entering into.
A Surety Bond is a guarantee that a company or individual will deliver on a specific obligation. That individual or company is the Principal, and if the principal doesn’t meet the obligation of the contract, then the beneficiary, known as the Obligee, may make a claim. The third party of a deal is the Surety. This is the company that will be paying up on that guarantee if the principal doesn’t follow through as expected.
All Surety involves three parties:
- The Principal: The contractor/licensee/trustee/applicant that’s supposed to be performing the work or fulfilling the obligation.
- The Obligee: The developer/estate/consumer/government entity for whom the work is being done or the party to whom the principal is promising that it will live up to its obligation.
- The Surety: The Company that is making the guarantee on behalf of the principal to the obligee.
Types of Surety Bonds
Surety Bonds come in all shapes and sizes. The various types of Surety Bonds have the concept of Surety in common, but they serve different purposes.
- Contract Bonds (Performance Bonds) are the kind used to guarantee construction projects.
- License & Permit Bonds
- Lost Document Bond
- Estate Bonds
- Customs & Excise Bonds
- International Surety Bonds
- Carnet Bonds
- Unclaimed Bank Balance Bond
- Miscellaneous Commercial Surety
Most people think of surety as something that is for construction companies and building projects. It is, of course, and that’s referred to as Contract Surety, which provides performance bonds guaranteeing that the contractor will perform the work, and labour and material bonds which ensure that the contractor will pay all vendors and subcontractors. There are also bid bonds that ensure that a contractor will, if awarded the contract, enter into that contract and obtain the other surety bonds that it requires. What many don’t realize is that Commercial Surety, covering all sorts ofbusiness and legal dealings away from a construction site, makes up almost 40% of the Surety industry.
What does a Surety Bond Cost?
The cost of a Surety bond varies significantly based upon the financial strength of the principal as well as the details of the obligation being covered by the Surety.
Though actual costs may differ between Contract and Commercial Surety, a common fact is that Surety bonds normally cost between half a percent and three percent of the value of a contract or bond obligation (limit).
The bond cost is referred to as the Premium, though is not to be confused with Insurance, which uses the same terminology. Bonds are often priced on a sliding-scale which means the larger the bond, the lower the percentage, and vice-versa. With respect to Commercial Bonds, the cost is often a flat rate, with the exception of Estate Bonds.