What are Surety Bonds?

Imagine that you work for a large public body such as a hospital, for example, and you have been tasked with managing the work required to build a new extension to house more operating theatres. After extensive design discussions with your architects, you are now in a position to reward contracts to construction companies who will be under contractual requirements to deliver the building works according to the specifications, on time and to the agreed costs.

As with most large scale building projects, there is often a conflict between the needs of the client (in this case, you, the project manager) to manage the project on time and to budget, and the needs of the contractors who have to ensure that the project remains profitable for them. This is where the contractual agreements play a vital role, but to ensure that the contractor delivers what is required, and fulfils the contractual obligations, they will be subjected to a completion guarantee. This guarantee will be in the form of surety bond, that is payable if the contract is not fulfilled as per the contractual obligations.

Three parties are involved with surety bonds

So, as we have ascertained, a surety bond ensures that contractual obligations will be met and if not, a pre-determined monetary amount will be forfeit. There are other forms of surety bonds, but let’s examine the parties that are involved with a contractor surety bond, which applies to our example.

The Principle

Firstly, there is a principle. This is the party that is obligated by the bond. In our hospital extension example, it is the contractor who is the principle so they must ensure that their contractual obligations are fully met, and that the client is satisfied with the final deliverable at the end of the contract.

The obligee

The obligee is the party that is protected by the surety bond. So in our example, the hospital that awards the building contracts is the obligee and would seek to protect itself from contractual failures from its building contractors. If the contractor (the principle) fails in its’ contractual obligations, then the hospital (the obligee) will receive financial compensation from the surety bond.

The surety underwriter

The surety underwriter ensures that the principle has sufficient funds to pay the obligee if contractual obligations have not been met. Going back to our hospital extension example, the building works could cost millions of dollars so a surety bond is likely to be taken out for a very significant amount to ensure that the hospital receives sufficient financial compensation should the building works prove sufficiently ineffective that a surety payout will be required to make amends.

A case stuffed with dollars

It is unlikely that a construction contractor will hold sufficient funds to finance their own surety bond so an insurance company will act as the surety underwriter and will receive a premium, according to the perceived risks, so that it is the underwriter who will actually reimburse the obligee.

The role of a surety agent

As with most forms of insurance, using an agent or broker who has a deep understanding of the market and has relationships with the main insurance companies, can often result in you getting the best deal.

So too with a surety agent such as https://bondsexpress.com/. An agent like BondsExpress will use its considerable expertise and experience to find the most cost effective surety bond insurance for your needs. The fact that different states in the USA have different insurance requirements means that specialist knowledge is invaluable to ensure that your project receives sufficient cover at cost effective premiums.

An example of a construction problem that could trigger a surety bond payout

Our example discusses the building of new operating theatres for a hospital, so part of that construction project will involve the delivery of high pressure oxygen and other gases to these theatres and recovery rooms. Continuity of these gaseous pressures is vital for the patients so it is vital that flow control and the correct pressures are delivered at all times.

Pressure gauges

If the correct pressure transmitters and transducers, such as these https://disensors.com/products/pressure-sensors-transmitters/pressure-transducers-pressure-sensors-transmitters/ are not installed correctly by the relevant contractor, a vital part of the construction specification will not be delivered and the hospital may seek redress via the surety bond.

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