A surety bond is a type of insurance that guarantees performance of a contract. If one party does not fulfill its end of the bargain, then the surety bond provides financial compensation to the other party.

What is a Surety Bond?

A surety bond is a form of insurance that guarantees contract completion. An obligee (or business) seeks a principal (or contractor) to fulfill a contract. To insure the obligee a successful delivery, the principal buys a surety bond so the surety company becomes responsible for its obligations. If the principal defaults, the surety company can either find another principal to fulfill the contract or compensate the obligee’s financial losses. In other words, the surety assures a successful contract because it assumes all financial obligations if the principal does not deliver.

There are three types of surety bonds:

• Bid Bond: Guarantees that the bidder on a contract will enter into the contract and furnish the required payment and performance bonds if awarded the contract.

• Payment Bond: Guarantees that suppliers and subcontractors will be paid for work performed under the contract.

• Performance Bond: Guarantees that the contractor will perform the contract in accordance with its terms and conditions.*

(*The term Final Bond means Payment Bond, Performance Bond,
or both Payment and Performance Bond.)
 

When do I need a Surety Bond?

Any Federal Construction contract valued at $100,000 or more requires a surety bond as a condition of contract award. Most State and municipal governments have similar requirements, as well as private entities. Many service contracts, and occasionally, supply contracts, also require surety bonds.

How does a Small Business apply for a Surety Bond?

Any business, large or small, must apply for a bond with a Surety Company or an agent that is authorized to represent the Surety Company. The business is then evaluated as part of an underwriting process that assesses such business attributes as character, capability and capacity. The purpose of underwriting is to gauge the likelihood that the contractor will successfully perform the contract. (Please note: SBA does not issue surety bonds. However, we provide a guarantee for bid, performance, and payment bonds issued by participating surety companies.) Click here to view a list of Surety Companies.

How do I obtain a Surety Bond?

You can acquire a surety bond through an independent agent or a surety company. As a small business owner, you can work with the Office of Surety Guarantees to guarantee your surety bond. The SBA does not issue surety bonds directly, but does work with agents to provide a guarantee for bid, performance, and payment bonds issued by participating surety companies.

Follow these steps to buy a surety bond:

• Find an agent or surety company. You can work directly with a surety company or with an approved agent. An agent has power of attorney to issue bonds on behalf of a surety.

• Submit required forms. If you are acquiring a bond through the SBA, you will need to complete a couple of forms about your personal and business financial status, bank information, and business plan, among others. You can file electronically or by paper application.

• Wait for SBA processing. After you submit your forms, the SBA will conduct a process to decide whether to approve your application. Generally, it takes only three to five days for an SBA Area Office to process a properly completed application for an SBA guarantee. Your ability to fulfill the contract and your performance capacity are important criteria for winning approval.

What are the laws governing Surety Bonds?

You must buy surety bonds if you are a prime contractor to the federal government running a construction project over $25,000. If you work with a state, county, or city government, you may or may not need surety bonds, so be sure to check with your local government agencies.