This article was written with the contractor in mind -- specifically contractors new to
surety bonds and public bidding. While there are many kinds of surety bonds, we're going to be focusing here on contract surety, or the kind of surety bond you'd need when bidding on a public works contract/job.

First, be thankful that I won't get too mired in the legal jargon involved with surety bonding -- at least not more than is needed for the purposes of getting the basics down, which is what you want if you're reading this, most likely.

A surety bond is a three party contract, one that provides assurance that a construction project will be completed consistent with the provisions of the construction contract. And what are the three parties involved, you may ask? Here they are: 1) the contractor, 2) the project owner, and 3) the surety company. The surety company, by way of the bond, is providing a guarantee to the project owner that if the contractor defaults on the project, they (the surety) will step in to make sure that the project is completed, up to the "face amount" of the bond. (face amount usually equals the dollar amount of the contract.) The surety has several "remedies" available to it for project completion, and they include hiring another contractor to finish the project, financially supporting (or "propping up") the defaulting contractor through project completion, and reimbursing the project owner an agreed amount, up to the face amount of the bond.

On publicly bid projects, there are generally three surety bonds you need: 1) the bid bond, 2) performance bond, and 3) payment bond. The bid bond is submitted with your bid, and it provides assurance to the project owner (or "obligee" in surety-speak) that you will enter into a contract and provide the owner with performance and payment bonds if you are the lowest responsible bidder. If you are awarded the contract you will provide the project owner with a performance bond and a payment bond. The performance bond provides the contract performance part of the guarantee, detailed in the paragraph just above this. The payment bond guarantees that you, as the general or prime contractor, will pay your subcontractors and suppliers consistent with their contracts with you.

OK, great, so what's the point of all this and why do you need the surety bond in first place?

First, it's a requirement -- at least on most publicly bid projects. If you can't supply the project owner with bonds, you can't bid on the job. Construction is a volatile business, and the bonds give an owner options (see above) if things go bad on a job. Also, by providing a surety bond, you're telling an owner that a surety company has reviewed the fundamentals of your construction business, and has decided that you're qualified to bid a particular job.

An important point: Not every contractor is "bondable." Surety bonding is a credit-based product, meaning the surety company will closely examine the financial underpinnings of your company. If you don't have the credit, you won't get the bonds. By requiring surety bonds, a project owner can "pre-qualify" contractors and weed out the ones that don't have the capacity to finish the job.

How do you get a bond?

Surety companies use licensed brokers (much like with insurance) to funnel contractors to them. Your first stop if you're interested in getting bonded is to find a broker that has lots of experience with surety bonds, and this is important. An experienced surety bond broker will not only be able to help you get the bonds you need, but also help you get qualified if you're not quite there yet.