The Surety Bond FAQ: Straight Answers to the Most Common Questions

Surety Bonds 101

Bernard Fleischer & Sons has been a surety-focused agency for more than 50 years, writing bonds of every size in 48 states — for strong credit profiles and challenged ones alike. These are the questions we hear most often.

What is a surety bond, anyway?

A surety bond guarantees the fulfillment of a legal obligation. It’s a three-party agreement in which a third party (the surety company) guarantees to a second party (the obligee — often a government agency or project owner) the successful performance of the first party (the principal — you). Bonds are required of anyone who administers public or private funds, and of individuals and businesses that need licenses or permits to operate in their trade — from contractors to taxi operators to licensed professionals of every kind. One of the primary uses of bonds today is protecting public and private funds from financial loss.

How is a surety bond different from insurance?

Very simply: you purchase insurance, but you must qualify for a bond. An insurance policy assumes losses will occur and prices the premium to cover them. A bond is an extension of credit — much like a bank loan — issued on the assumption that the obligation will be fulfilled and no loss will occur. The premium covers the surety’s underwriting expense, not expected losses. That’s also why, unlike insurance, a claim paid on your bond must be repaid: as principal you sign an indemnity agreement making the surety whole for any loss.

What are surety bonds used for?

Bonds are a risk-transfer mechanism: the risk of non-performance shifts from the obligee to the surety. Governments require them to guarantee that businesses comply with the laws protecting public funds. Contract bonds protect taxpayers and private owners by guaranteeing construction projects are completed properly, on time, and lien-free. Courts use them to process cases and allow appeals. Any activity requiring a city or county permit — construction, demolition, drilling, blasting, street closures, special events — will almost always carry a bond condition.

What types of bonds are available?

The main families: contract/construction surety (bid, performance, and payment bonds required on publicly funded projects), commercial surety (license, permit, probate, and court bonds required to operate under a license), and fidelity bonds (protecting employers against employee dishonesty, including commercial crime coverage for burglary, robbery, and forgery).

What does “bondable” mean?

It does not simply mean holding a license bond. Bondable means a surety underwriter has analyzed the contractor’s capital, character, and capacity and determined the contractor can perform certain types of work within established parameters — and will issue bonds guaranteeing performance and payment within those guidelines.

What is a bid bond?

A bid bond stands in for the cash deposit (usually 10% of the bid) that project owners require with bids. It guarantees that if you’re the low bidder, you’ll execute the contract and provide the required performance and payment bonds. See our full guide to bid and performance bonds for more.

Are letters of credit a suitable substitute?

No. In a default, a surety has duties to both the contractor and the owner and works to see the project completed. A bank letter of credit simply pays out a sum on demand — the bank takes no role in completing the work, the amount is often insufficient to cover the owner’s real costs, and your credit line is tied up (and callable at any time) in the meantime.

How do I get a surety bond?

Work with a surety agency. The agent maintains direct contact with you, gathers what the underwriter needs, matches you with the surety company best suited to your needs and capabilities, and handles processing and delivery of your bonds. At Bernard Fleischer & Sons we process bonds as fast as possible — often the speed of your bond depends mostly on how quickly you can supply what’s needed.

What does it take to get set up with a surety company?

For contract bonding, a surety ideally wants to see CPA-prepared business financial statements (up to three years), work-in-progress schedules, accounts payable/receivable schedules, company and owner histories, bank references, and a completed questionnaire — though surety support is often established with less. For smaller contracts, some sureties use a simple one-page application based solely on the applicant’s credit.

How does a bonding agency underwrite?

Like a bank evaluating a loan. Since a bond is an extension of credit, the underwriter analyzes your financial standing and business aptitude — financial statements, credit reports, references — to determine whether you can support the bonded obligation.

Can a start-up company qualify?

It’s more difficult, but not impossible. In addition to pro forma financial statements, the surety will typically require personal indemnity of the owners and spouses along with collateral — for example a certificate of deposit or letter of credit held by the surety. When the job is complete and the owner releases the bond requirement, your collateral is returned.

How can a small business benefit from bonds?

Bonds protect against contractor default, help avoid costly delays and disputes (the surety can intervene before it’s too late), and add a layer of payment protection for your workers and suppliers. Most importantly, bonding levels the playing field — letting a small contractor compete for lucrative public and private work.

How much do surety bonds cost?

Contract bond premiums generally range from one-half of one percent to two percent of the contract amount, depending on the size, type, and duration of the project and on the contractor. The premium is typically included in the bid, payable on execution of the bond, and adjusted if the contract amount changes. Commercial bonding has a wider pricing range; higher-risk programs carry higher premiums and may require collateral.

How long will it take?

It depends mostly on how quickly you respond with what’s needed. The faster your agent has the required information, the faster it goes to the surety for approval. Many license and permit bonds can be issued the same day.

What happens if the surety pays a claim?

You’re legally obligated to reimburse the surety for any loss and expense — the surety has the same recourse against you as any creditor. But note: a pending claim doesn’t necessarily mean a loss. The surety investigates first; if the claim is valid you’ll have the opportunity to satisfy it before the surety settles with the obligee and pursues collection.

Questions we didn’t cover? Call 800.921.1008 or start an application at bfbond.com.