When a contractor is awarded a project, the contractor will be told to provide a surety bond which guarantees that the contract will be completed, completed on time and completed to the specifications. Surety bonds are inexpensive, they do not demand that the contractors assets be tied up or frozen, thus allowing for the completion of multiple contracts at the same time. From the owner’s viewpoint, bonding gives him a mechanism that allows the job to get back on track in the event the original contractor fails in his obligation.
Surety bonds in California are very common in the construction industry but they are as applicable to many other industries. The bond can be used to guarantee the performance of the order, it can be as simple as shingling a roof or as complex as contracting a huge building where there will be many sub contractors involved. In many cases the government demands that a company be covered by a surety bond before the business license is granted and in these cases, the bonded company advertises the fact as a show of its reliability and trustworthiness.
- Every surety bond has three parties;
- The obligee (customer)
- The principal (contractor)
- The surety (the bonding company)
When the principal applies for a surety bond, the surety does an in depth investigation of the company and its finances. The process is similar to what a lender would do in the event of a loan application; the surety wants a full set of accounts that go back at least three years and a detailed credit report. The surety may also want details of the project and confirmation that the principal has done similar work in the past with no problems. When the application has been approved, the principal pays a premium, it is usually somewhere between one percent and five percent of the contract price which is the bond amount.
The relatively low cost of surety bonds in California is the main benefit. If it was not possible to raise a bond, the principal would have to pledge the company’s funds and secure them against an LC. This would place a tremendous burden on all principals except the largest as it would tie up the funds of the company for a considerable period of time.
Surety bonds in California can be specific and the state has more bond requirements than most. BuySurety.com can provide you will a quick quotation on any California surety bond.