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Many people think of surety bonds like a line of credit. If you can’t complete a project, the project owner can tap into that line of credit to finish the project as necessary.
Surety bonds are three-party agreements and include:
- The surety company which supplies the bond
- The obligee, who is the project owner
- The principal, which the contractor, organization or employer providing the work
Before many contractors can begin jobs, project owners will require surety business bonds. Many federal projects or those that cost a certain amount will require a bond, which can be obtained in amounts high enough to cover the entire project.
License / Permit Bonds: The obligee, which is often a government agency, requires a bond from the principal. The bond states that all codes and regulations will be followed. For example, a plumber may be required to obtain a license before beginning work. To get a plumber license, you must secure a license permit bond, agreeing to adhere to the city plumbing code.
Public Official Bond: This bond states that elected or appointed officials will perform the duties they are given. Typically bonded positions include notaries, judges, and treasurers.
Contract Performance Bonds: This bond guarantees that you will follow all terms and conditions set forth by the contract. Many require advance notice. Types of contract performance bonds include bid bonds, performance bonds, and payment bonds.
If you aren’t required to purchase a surety bond, why would you? Surety bonds can be beneficial to both parties. As the principal, obtaining a surety bond prior to working with a new project owner displays business integrity and financial stability. To be approved for a surety bond, principals must meet certain standards set by a surety company. Being rewarded with a surety bond from a top quality surety company is a testament to the strength of your business.
For the project owner, surety bonds can be a lifesaver. Even if a terrible tragedy prevents a principal from fulfilling a contract, the project must still be completed. Working with a principal that possess a surety bond can provide peace of mind that, no matter what, your job will be completed.
There are several factors to consider when the cost of the bond is determined; the principal’s financial status, type of bond, the surety company.
Depending on the amount of the bond, you can expect to pay between 1 to 3 percent of the total cost of the project. Of course, your financial status may raise or lower your total payment.
Your experience and credit score also contribute to the premium that the surety company will charge you. If you don’t have a history of projects, you may be more expensive to bond, simply because the surety company cannot determine how much risk you represent. If you are the principal, and you don’t have an excellent credit score, the surety company will most likely charge a higher premium because you represent a greater risk.
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