Think you are pretty familiar with the various surety bonds contractors may need? See if you can identify these five that we are commonly asked to provide by contractors and our agency partners. Also try for the Bonus Question at the end!
- Mystery #1: In this instrument, the bonding company guarantees that a contractor / “principal” will correct defective materials and / or workmanship in a completed project. These bonds are often written for one or two years.
- Mystery #2: This bond is issued with a municipality as beneficiary. It guarantees that the construction company, if allowed to disrupt public property, will restore the area after performing a contract and prevent the municipality from having to pay for such reconstruction. Hint: A plumbing contractor may need these.
- Mystery #3: Number three is a form of financial guarantee that promises a money penalty will be paid if the construction company does not enter into a contract when expected to do so.
- Mystery #4: This one is a guarantee that the construction company will comply with all the terms in a written contract and faithfully pay suppliers of labor and material used in connection with the project.
- Mystery #5: Also written with a municipality are beneficiary, this bond promises that the principal will build certain “public improvements” stipulated by the municipal engineering firm. The municipality does not have a contract with the principal, nor will it pay for the work.
OK, got your answers?
#1: This is a Maintenance Bond. They normally are issued after the completion / acceptance of a contract. The dollar amount is often for less than the contract.
#2: A Street Opening Bond is an example of a Permit Bond. This enables a contractor to cut the street open for access to water and sewer connections. If the municipality grants permission for the work, they expect it to be reconstructed in accordance with local building standards, and not at public expense.
#3: Is a Bid Bond. Bid bond amounts are often expressed as a percentage of the proposal they accompany (such as a “10% bid bond”). This is because the actual bid amount is confidential to the bidder at the time of bond issuance. If the bidder fails to accept an award of the contract, the bid bond penalty may be claimed by the obligee to reimburse them for going to the second (higher) proposal.
#4: A Performance and Payment Bond (aka Labor and Materialmen’s Payment Bond) is issued usually for 100% of the contract amount. These are commonly required to protect the public interest on government contracts. Private owners and lenders may also stipulate them.
#5: A Site Bond. Contractors sometimes ask us for these, but the correct applicant is the property OWNER, not the construction company being hired to do the work.
If the contractor furnishes this bond (we do NOT recommend this), they become obligated directly to the municipality, and must build the required public improvements even if they are not paid by the property owner. Bad! The site bond obligation more correctly lies with the property owner / developer.
Bonus Question: This bond is different. It has the construction company as the obligee / beneficiary of the bond. The “principal” (the party whose actions are the subject of the bond) are the company employees. The bond reimburses the company for dishonest acts committed against it by its employees. What type of bond is it? Unscramble these letters for the answer:
l e f i y t i d
FIA Surety is a NJ based bonding company (carrier) that has specialized in Site, Subdivision and Contract Surety Bonds since 1979 – we’re good at it! Call us with your next one.
Steve Golia, Marketing Mgr.: 856-304-7348
First Indemnity of America Ins. Co.
(Don’t miss our next exciting article. Click the “Follow” button at the top right.)