How does Real-Time Risk Management improve my bond capacity?
We all want to be better tomorrow than we are today. Traditional brokers base your bond capacity on historical information. Real-Time Risk Management gives our surety bond team more data than that. We use verifiable system outputs to project what will happen tomorrow - and maximize your capacity today.
What is a surety bond?
A surety bond is a contract involving three parties: the surety, the principal, and the obligee. In the contract, the surety guarantees the principal’s performance to the obligee. If the principal fails to perform according to the agreed-upon terms, the surety will pay for the failure. Surety bonds are typically required for any company working on government contracts. Private contracts in sectors like construction, agriculture, and transportation also often require bonds.
What's the difference between a surety bond and insurance?
While a surety bond is sometimes referred to as “bond insurance,” there are several significant differences between bonds and insurance. Getting a surety bond is more like securing bank credit than buying insurance. Here are some of the main differences:
- Approach to losses - Surety bond providers use prequalification to try to prevent losses. Insurance policies spread losses among a group of similar risks.
- Limits - The amount a surety will cover depends largely on your company’s financials. Conversely, the details of your insurance policy are determined by your risk profile.
- Coverage - Bonds cover 100% of the contract price, while insurance only covers up to a policy limit. Bond coverage is project-specific, while insurance coverage is term-specific.
- Liability - If a surety pays out on a claim, the principal remains liable and must repay the surety. By contrast, an insured business does not pay back the insurance carrier for a claim.
In short, when a surety bond pays out, it’s more like a loan than an insurance claim. The purpose of a surety bond is to protect the obligee. Most often, this means ensuring that laborers and suppliers are paid for work and materials. If a claim is filed, the principal is still on the hook for financial losses - the surety just pays the obligee up front.
What are contract surety bonds and the different types?
Contract surety bonds are bonds written for construction projects. There are six main types of contract surety bonds:
- Bid bond - Protects the obligee if a bidder wins a contract but fails to sign the contract or provide the necessary additional bonds. Bid bonds help screen out unqualified bidders, since a surety will not issue a bond to a contractor it believes can’t fulfill the contract.
- Performance bond - Guarantees the completion of a project according to contract terms if the principal fails to fulfill the contract terms.
- Design build bond - Guarantees a design build project. In this type of project, the designer and contractor work together from the beginning. The inclusion of design work increases the project’s exposure. For this reason, design build bond rates are usually 20-50% higher than performance bond rates.
- Labor and material payment bond - Ensures that subcontractors and suppliers are paid for labor and materials if the principal fails to make payments. Often called “payment bonds.”
- Warranty bond - Guarantees that any defects found in the work done during the contract will be repaired during the warranty period (usually a few years).
- Maintenance bond - Guarantees that the principal will fulfill the maintenance work outlined in the contract.
What types of construction projects require surety bonds?
A variety of construction projects might require a contract bond. They’re required by federal, state, and local governments for construction contracts valued over certain amounts. The Miller Act specifies federal requirements, and each state has a “Little Miller Act” governing state contracts. While not mandated, private owners and general contractors may also choose to require surety bonds. This helps them ensure the contract will be completed, and suppliers and subcontractors will be paid.
What is bonding capacity and what are the different types of capacity?
Bonding capacity is the maximum amount a surety will cover. Underwriters use financial signs like revenue, net worth, liquidity, and debt levels to determine a principal’s bonding capacity. There are two types of capacity, known as the single-job limit and the aggregate limit. The single-job limit is the largest amount the surety will guarantee on one project. The aggregate limit is the total amount of work, across projects, that the surety will back at one time.
How do I increase my surety capacity?
The best way to increase your surety capacity is to provide timely, accurate financial information to your underwriter. Leaving your surety carrier guessing does not build confidence. Provide frequent updates to show that your company is organized, transparent, and on a positive trajectory.
How much does a surety bond cost?
The cost of a bond is a percentage of the final contract price. The percentage is based on rates filed with the state insurance department, usually ranging from around 1-4%. Your financial standing, credit score, and other factors determine your bond rate. Because the cost of a project usually fluctuates, your bond premium will be adjusted based on the final contract price.
Who pays for a surety bond?
The principal pays the premium for a surety bond. The premium is due upon the execution of the bond and underlying contract. If a claim occurs, the surety pays up front for the project costs up to the contracted amount. Then, the principal must reimburse the surety for those costs.
What happens if my business defaults on a surety bond?
If you default on a surety bond, the obligee will file a claim with your surety. The surety will conduct an investigation to see if the claim is valid. If it is, the surety will act according to the details of the bond. The surety’s actions vary depending on the type of bond, and could include:
- Completing the contract according to specifications
- Making sure suppliers and subcontractors are paid
- Repairing defective work