What’s the Difference Between a Surety Bond and a Contract Bond?
The world of insurance can be complex—and for contractors, work can be dangerous, too. As a contractor, the question of what insurance you need to stay protected is likely to come up.
So, for starters: What’s the difference between a surety bond and a contract bond? Which do you need to stay safe?
Today, Brenda Jo Robyn, founder of Competitive Edge Insurance, is here on camera to give us the spiel; including the differences, benefits and risks, and what you need. Let’s dive in.
What is a Surety Bond?
There are three parties involved in a surety bond, including:
- The surety company
- The principal or the insured
- The obligee
A surety bond is a contract where one party (the surety company) guarantees the performance of certain obligations in a contract of the second party (the principal or the insured) to a third party (the obligee).
When Do You Need a Surety Bond?
Surety bonds are needed for most licenses in the state of California and other states as well. Some examples of who might need a surety bond include:
- Real estate companies and agents
- Financial institutions
- Janitorial personnel
Why Do You Need a Surety Bond?
Licensed bonds are required in many states to do business, and are put in place by the state to protect the consumer.
The insured, or principal, purchases this bond in an amount prescribed by the state to pay the obligee (the state at this point), in case there’s a claim against someone’s license.
What is a Contract Bond?
A contractor performance bond is a written contract that guarantees the performance obligations under a contract.
Contractor performance bonds are used frequently in the construction industry but are also sometimes used in manufacturing and supply chains as well.
When Do You Need a Contract Bond?
The short answer: It depends! Contractors can be required to have a contract bond for different parts of the process when they’re bidding for a job, according to Brenda Jo.
What Is a Bid Bond? When Do You Need One?
Oftentimes, a bid bond is required to submit a bid for a project. Typically, these bids are in the public arena for states or cities. For example, the Department of Forestry.
“A bid bond lets this entity know that the contractor can provide a payment and performance bond should the job be awarded to them,” says Brenda Jo.
“If the contractor is awarded the project and the contractor decides that they cannot fulfill the obligation, the bid bond helps to pay for the difference in price that it costs to get a new contractor in.”
This leads to the next kind of bond couplings, which is the payment bond and the performance bond. Let’s discuss.
Payment Bonds and Performance Bonds
What is a payment bond? What about a performance bond?
A payment bond is a bond that guarantees payment for subcontractors and payment for materials.
A performance bond, on the other hand, covers the ability of the contractor to perform and finish the job as per contract requirements. If the contractor doesn’t perform, the contract bond kicks in and helps to pay for the completion of that performance.
A Final Word
An important note: For all bonds mentioned, if they’re used and there’s a claim on a bond, the contractor who purchased the bond has to pay that back, says Brenda Jo.
This considered, surety companies look for strong financials in a company, including:
- Lines of credit
- Letters of credit
Surety companies look for anything that creates a picture that says you’re worthy of having a bond put into place—because if the bond is utilized and pays out, they need to know that the purchaser of the bond can pay that money back.
Bring in The Experts
At Competitive Edge Insurance, we work with insurance carriers across the country to place all types of business coverage. We are always seeking out new insurance companies to write hard-to-place and high-risk business insurance.
Don’t let cancellation dissuade you from finding comprehensive coverage. We can help! Learn more by connecting with our team today.
Additionally, for those interested in learning more, choose between our articles on the key differences between general contractors and construction managers and the difference between payment and performance bonds.