When signing contracts with clients, you might have to buy surety bonds. They reassure clients that you will meet your contractual obligations or pay up. Contractors have choices of surety bonds. You might need to invest in several to help you meet your appropriate obligations. Let’s take a closer look at how some of the different types of surety bonds work.  

Understanding Surety Bonds  

A bond is a guarantee of compensation in case a contractor cannot execute the contract. Should the contract fall through, the client might have a right to file against the contractor’s bonds to receive this compensation. The surety company that issues the bond will then provide compensation to the client. However, the contractor will have to compensate the surety company in return. Therefore, surety bonds are not insurance in the pure sense. They are simply promises that the business has the money to meet its obligations.  

Enrolling in bonds involves three parties:  

• Sureties: The companies that issue and maintain bonds.  
• Principals: The parties that buy the bonds as guarantees. If you are the contractor, then you are the principal.  
• Obligees: These are the parties that require you to carry the bonds. They are those you compensate in case you can’t meet the bond’s promises.  

The surety company acts as the middle man that assures the obligee that they will receive compensation if you break a contract. However, you are not going to get off the hook just because the surety company might agree to repay the obligee. You will still likely have to compensate the surety company.  

Common Surety Bonds  

If you plan to bid for a contract, then your potential client might require you to buy certain bonds. These are contract bonds, and each might serve a different purpose. Consider how they might apply to your contractual obligations:  

• Bid Bonds – If you apply for a contract and get accepted, this bond guarantees you will be able to enter the contract. 
• Payment Bonds – As a contractor, you might have to pay subcontractors and other costs of the project. Therefore, this bond guarantees the client that you will do so.  
• Performance Bonds – Many contractors must perform certain activities and meet certain timelines according to the stipulations of a contract. If you fail to do so, then this type of bond can compensate the client.  
• Supply Bonds – Whatever material and supply costs you accumulate during the project, you must pay for. This bond shows that the cost will not not devolve onto the client. 
• Maintenance Bonds - If you have to provide maintenance after you complete a project, this bond helps ensure you will do so. 
• Warranty Bonds – If the client discovers defects in the work you do, then you guarantee to fix the problem for them.  

Keep in mind, if you plan to hire subcontractors, then they might have to carry bonds, too. Therefore, ensure that all parties who will work on your contracting job. If you find that they do not have a bond, then consult with your surety company and your client, as needed, to see how to cover them.  

When to Buy a Bond  

Often, when you bid for a contract, the contract will declare which bonds you must buy and what value they must have. Once you receive the contract and sign, you then agree to buy the necessary bonds. You will need to do so before you start the project. That way, you will have protection from start to finish.  

Enrolling in a bond means working closely with your surety company. The surety company will review your qualifications for the bond. They can guarantee that you do in fact have the financial reserves to compensate clients. Therefore, you’ll be able to move forward with the contract effectively.