A contractor's surety bond is an agreement between a contractor, client, and surety company that provides financial assurance the contractor will complete the job satisfactorily. The bond protects the client from losses resulting from the contractor's failure to pay suppliers, subcontractors, or complete the work. The surety company assesses the contractor's history, assets, experience, and financial strength to determine the bond amount. Having a bond helps contractors attract clients and allows them to bid on larger projects by establishing credibility.

1. Contractor's Surety Bond
A contractor's surety bond is an agreement between the contractor,
client and a surety issuing company. The contractor is also referred to
as the bond principal, while the customer is referred to as the obligee.
In most states, the contractor is required to be bonded before a license
can be issued. Big projects normally require a specific bond that covers
only that particular project.

2. Functions of the Bond
• A surety bond for contractors offers a financial assurance that the
contractor will do the job correctly and in a timely manner. In
case the contractor fails to make good on his obligations, the
insurer will pay a pre-determined amount to the client. The bond
may also include reimbursements for damages to properties due to
the fault or negligence of the contractor, unpaid materials
suppliers or subcontractors, and stolen or lost materials.

3. Significance of the Bond
• The bond helps in attracting clients as they are given more
assurance on the contractor's capability to finish the job. This is
important when you are dealing with a new client who is not sure
about the contractor's quality of work. Suppliers and
subcontractors may likewise prefer working with a bonded general
contractor simply because there is assurance that they will
receive their payments as stipulated in the contract.

4. Bond Amount
• The amount of premium for a contractor's surety bond is primarily
based on the surety's risk assessment and the bond's payout
amount. The underwriter will analyze the history of contractors
as far as relationships with owners, suppliers, subcontractors,
architects, and engineers are concerned. The contractor's current
net worth is also considered in determining the bond's failure risk
probability.

5. Bond Amount
• A contractor who has a significant amount of assets under his
name is more likely to finish a job compared to one who is
struggling to even meet his monthly payroll requirements. A bond
amount is set depending on the available employees and
equipment at the contractor's disposal that are indicative of the
company's delivery potentials.

6. Important Considerations
• When in need of surety bonds, contractors should shop around
first as rates may vary between providers. Some companies offer
higher limits that allow contractors to place bids for bigger
projects. The surety company's reputation and financial strength
are also important. Clients and suppliers may sometimes be
hesitant to work with contractors whose bonds are issued by
unknown companies.

7. Filing a Claim
• In general, contractor's bonds require obligees to file pre-default notices
in order to give the insurer an opportunity to avoid defaults. A meeting is
initially scheduled between parties involved in the default such as the
client, surety, contractor, and concerned suppliers and subcontractors. If
it becomes apparent that the parties will not come to an agreement to
complete the job, the surety may, at its discretion, decide to finish the
task or bring in another contractor.
• If it is merely a question of funding, the insurer may loan or advance the
amount to the contractor so he can complete the job. However, when
default is inevitable, the surety company is required to pay out what is
stipulated in the surety bond.