In Plain English
Quick Answer
The bonding company that guarantees a contractor will fulfill their obligations and will pay or complete the work if they default.
Definition
Definition
A surety is a company, typically an insurance company, that issues surety bonds guaranteeing that a contractor will fulfill its contractual and legal obligations. If the contractor defaults, the surety is obligated to complete the project or pay damages up to the bond amount. Surety companies evaluate contractor qualifications carefully before issuing bonds.
Context
Why It Matters in Bidding
A contractor's bonding capacity often determines which projects it can even bid, since public and large private owners require performance and payment bonds before award. The surety's prequalification of a contractor's financials and track record effectively gates the bid, and bond premium is a real line item that must be carried in markup or general conditions.
Example
Example
Before bidding a $4M public school project, a GC confirms with its surety that the job fits within its single-project and aggregate bonding limits, then carries the bond premium as a percentage of contract value in the bid.
See Also
Related Terms
FAQ
Questions Contractors Ask
How does a surety differ from an insurance company on a project?
Insurance protects the policyholder against its own losses, with premiums priced to cover expected claims. A surety is a three-party guarantee in which the surety expects no losses and can recover from the contractor after paying a claim. Sureties underwrite the contractor's ability to perform, not just risk transfer.
What does a surety look at before bonding a contractor?
Sureties evaluate the three Cs: capital, capacity, and character. They review audited financials, working capital, credit, completed-project history, current backlog, project management depth, and continuity plans. Strong, consistent results raise both single-project and aggregate bonding limits, expanding the range of work a contractor can pursue.
Who pays for the surety bond on a construction project?
The contractor pays the bond premium, then passes it through in the bid, usually as a percentage of contract value carried in general conditions or markup. On public work the cost is effectively borne by the owner since it is built into the contract price the owner accepts at award.
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