Everything You Need to Know About Surety Bonds
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Surety Bonds Definitions
To help you differentiate the various types of construction bonds.
A Surety Bond Indemnity Agreement is an agreement between the principal and the surety bond company stating the company will be indemnified if it pays out a loss on the Principal’s behalf due to a surety bond claim. In other words, if the contractor causes a loss to the bond company, the company would then seek to be reimbursed (or indemnified) by the contractor for the amount of the loss plus any other expenses incurred from the default.
A bid bond is the most commonly used risk management tool at the tender stage. It is a legal instrument, enforceable by law. A bid bond provides assurance to the project owner from the bond company that the bidder is not only qualified, but they will take their tendering obligations seriously and will follow through on their bid. Should a contractor not enter into a contract after a bid bond has been posted, this will result in a claim against the bond for which the contractor will be held responsible for reimbursing the bonding company.
A Performance Bond guarantees that the contractor will perform its obligations to the owner according to the terms and conditions of the contract. The basic function of a performance bond is to provide financial protection to the project owner up to the amount of the bond in the event of default on the part of the contractor. It should be kept in mind that the surety company will look to the contractor for recovery of its loss under the indemnity agreement.
Agreement to Bond
Also known as a “Consent of Surety”, the Agreement to Bond is a legal commitment, but it is not a true bond as it is only executed by the bond company, not the contractor. It confirms to the project owner that should the contractor be awarded the job and enter into a contract, the surety will provide the performance and/or labour & material payment bonds as per the terms outlined in the Agreement to Bond.
Contract Surety Bonds
Often required by government, private and institutional organizations, Contract Surety bonds provide a guarantee that projects will be completed successfully and on-time. They are commonly used in the construction industry to ensure contractors fulfill their obligations to project owners. Contract Surety is the general name that encompasses all the different types of bonds used by the construction industry.
Labour & Material Bond
A labour and material payment bond guarantees that the bonded contractor will pay all claimants for goods and/or services supplied to the bonded project. A claimant under a labour and material payment bond is a trade contractor or supplier who has a direct contract with the bonded contractor to supply goods or services to the bonded job. In order to make a valid claim, it must be submitted before the expiration of 120 days from the last day the claimant worked on the project or furnished materials to the project.
A maintenance bond will guarantee that the contractor will comply with the warranty provisions of the contract for a specified period of time. These bonds offer protection from defective workmanship and/or materials. More often than not, the maintenance period is covered under the performance bond so that a separate Maintenance Bond is not required.
Commercial Surety Bonds
Commercial surety bonds satisfy the security requirements of federal and/or provincial courts, government bodies, financial institutions, and private corporations and protect against financial risk. These bonds guarantee that the business or individual will comply with all required legal obligations. Common Commercial Surety Bonds include: Court Bonds, Customs & Excise Bonds, License and Permit Bonds and Land Reclamation Bonds.
A pre-qualification letter is not a bond, nor is it a legal commitment. It is a letter from the surety to the owner that confirms the ability of the contractor to post bonds. By issuing this letter, the surety is acknowledging its business relationship and familiarity with the contractor. A pre-qualification letter is not binding.
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