What is a Surety in a Contract?
In general, the term surety under the construction contract means the third party who agrees to assure the performance of a contractor’s duties according to the terms of the contract. The surety bond is a tripartite agreement involving the contractor (principal) on one party, the project owner (obligee) on the other, and the surety company (the guarantor) on the third party.
⦁ Principal: Potential client who seeks a contractor who will perform the contractual obligations.
⦁ Obligee: The party to the contract opting to have a bond for the other party to guarantee the project’s completion.
⦁ Surety: A financial tool that allows a third party to guarantee the contractor’s performance to the obligee in case of the bond contract’s violation.
In cases where the contractor defaults on executing or delivering the project in the agreed time, the surety company is expected to make good the loss or complete the project up to the surety amount attached to the bond. Contracts facilitate the management of risks such as contractor default, non-compliance, or poor performance since the project owner is shielded from such risks.
What are the Principles of Surety?
Indemnity
It also obliges the contractor to indemnify the surety should the latter suffer a loss due to a claim. This means that the latter is financially liable for its performance and all consequences that stem from it—the contractor will inevitably end up paying the price.
Risk Assessment
If surety companies are to provide bonds for such a contractor, they are required to analyze the contractor’s financial capacity, prior experience, and capability to perform the contract. This assessment also helps the surety estimate the level of risk involved.
Joint Responsibility
The surety bond thus fosters an equal obligation shared between the contractor and the surety company. The surety signs the contract and gives a bond, while the contractor is mostly held responsible for performing the contract.
Mitigation of Losses
It is very common for the surety company to control the risk factors and always monitor the contractor to avoid such potential risks cost by cost.
Financial Guarantee
A surety is all about giving the project owner a guarantee, which acts as the primary foundation of the surety business. This guarantee ensures that there is money down with which the project can be completed or used to compensate for loss in the case where the contractor is in default.
What Are 3 Ways a Bond Can Be Issued?
Here are the three primary methods of issuing surety bonds:
Bid Bonds
It is a financial guarantee that is submitted to the relevant authorities during the bidding phase of a construction contract. These bonds ensure that the contractor will submit the bid as proposed, with evidence that he will offer the agreed performance and payment bonds in case of being awarded the contract. Should the contractor who has been bonded not perform according to the bid, then the surety will be responsible for paying any monies to the project owner offered by the defaulting contractor and paying the difference between the defaulting contractor’s bid and the next lowest bidder.
Performance Bonds
Performance bonds are given out once the contract has been tendered out to the contractor. These bonds provide assurance that the contractor will fulfil the project as provided on the contract document. When the contractor does not fulfil their obligations, the surety company takes over completing the project or pays the owner of the project the workmanship cost.
Payment Bonds
Such bonds guarantee that the contractor will honor remunerations to the subcontractors, suppliers, and labourers involved in the project. These bonds guarantee non-payment to these parties and save the property from being charged to secure labour or materials.
Frequently Asked Questions
Q1. What are the principles of surety?
The principles of surety include various factors such as risk assessment, joint responsibility, loss mitigation, as well as providing a financial guarantee.
Q2. What is the purpose of bonding in construction?
The purpose of bonding in construction is to ensure financial security and protect project owners from losses caused by contractors.
Conclusion
Construction surety bond is an important document in the construction industry, so if you’re looking for professional advice, Can Do Surety Bonds should be your go-to place.
