If you are a contractor (of any industry), you’ll promise clients that you’ll finish their work according to their stipulations. Contracts are not stipulations to take lightly. They are legally-binding. Yet, you can’t eliminate the possibility that a project will go awry.

If you fail to honor your obligations, what can you do? Many businesses turn to Surety Bonds to help in case of project defaults.

What’s a surety bond?

Surety bonds fall under the umbrella of consumer protection. They function like an insurance policy.

If you make a contract with a client, a surety bond functions as a guarantee that you will do the work accordingly. If you fail to follow or complete a contract, the client can file a claim against the bond. Therefore, they’ll be able to recoup some of the money lost by the failure of the project.

How do bonds differ from insurance?

Yes, bonds provide a financial settlement for your clients. Still, they are not the same as insurance.

With insurance, the insurance company pays a settlement on your behalf. Under a bond, however, you must pay the settlement to the affected customer. Therefore, the bond functions like a guarantee that you will cover the customer’s losses in case of a problem on your end. It tells your clients that you have the financial backing behind you to do their work appropriately.

Who are the parties of a surety bond?

Surety bonds involve three parties:

• The Principal: The person, company or entity carrying the bond. If you are the contractor, you’ll have a bond in your name.
• The Obligee: This is the individual who benefits from a bond. It’s usually the party who you work with under a contract. They will be the one to make a claim on a bond if necessary.
• The Surety: The company that issues and maintains the bond. The principal pays the surety a premium to maintain the bond. In some cases, the bonding company will pay a settlement to the obligee initially. The principal must still compensate the bond company, however.

How much bonding do you need?

Countless standards go into determining how much money principals need to carry on bonds. For example, industry standards and a company’s net worth often play a role.

However, one of the best places to look is within a contract itself. Many obligees will require the principal to carry certain bonds. Indeed, they might only award a contract after the principal enrolls in the bond. Work closely with your obligee to make sure you have bonds according to stipulations.

Bonding can help you win contracts and better serve your customers. Let us help you determine the appropriate amount of coverage for your needs.