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Contract Surety 101

Sponsored by SFAA: What You Need To Know About Contract Surety Bonds

A bond is a type of insurance, issued by insurance companies called sureties, that serve as a risk mitigation tool for states and localities. They have two key benefits: protection and prequalification. Contract surety bonds, which include performance and payment bonds, help provide assurance to the public, subcontractors and suppliers that companies and individuals will meet their performance and financial obligations when they undertake a project, and that taxpayers and consumers aren’t on the hook financially in the event they fail to do so.

For the Record: What You Need To Know About Contract Surety Bonds

Sureties pay billions of dollars a year in claims. Over the last 15 years, surety companies paid nearly $12 billion to complete construction contracts and pay subcontractors and suppliers what they were owed. These numbers do not include the significant amount of money sureties spent to finance troubled contractors so they could complete contracts and protect the government from a default.

Other important facts:

Sureties provide an independent third party opinion that a contractor is qualified to perform. Sureties are in a unique position to prequalify contractors as they have access to confidential information typically unavailable to a project owner.

Waiving bonds hurts small and minority contractors. If bonds are waived, the small contractor may never receive his or her business review from a surety and will not have the opportunity to build a successful track record with the surety company.

Raising bond thresholds exposes small and minority contractors to loss. Raising bond thresholds increases the risk of non-payment and contractor default due to the lack of a surety’s extensive prequalification process. Failure to get paid can be catastrophic to small contractors.

No other product provides the same protection as bonds. No other risk management product provides the comprehensive protection that bonds provide, which is to guarantee that a construction contract will be completed and workers on the job will be paid.

To learn more about the role of contract surety bonds in state and local government, download “A Government Leader’s Guide to Bonds”.

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