Answers To Your Questions About Surety Bonds
As your construction business grows, you may find yourself bidding on larger and larger projects. When this occurs, it won't be long before you need a surety bond to secure the bid. At its most simple, a surety bond is like an insurance policy – a surety company covers your promise to complete the work as specified by the client. If this is your first time seeking such a bond, you will likely have some questions, so read on for answers.
Are there any upfront costs to securing a bond?
Yes, but they will vary depending on the amount of the bond and the percentages required by the bond company. As a general rule, expect to pay the surety company up to 15 percent of the bond amount upfront, but it can be as little as 1%. Generally, the better your company's credit rating the lower the percentage rate. Your rate also goes down as your company gains a reputation for finishing the work on time.
Is there a waiting period?
The waiting period is generally no more than a few days at most, with many bonds issued immediately upon application approval. There may be a brief wait between acceptance and issuance as the bond company verifies that your initial payment clears. Each bond company differs slightly in approval policy, so contact the companies you are interested in working with to get specific details.
What happens if there is a claim on the bond?
Although compared to insurance, a surety bond has a key difference – it is an insurance policy you purchase for the client, but for you, it is simply a form of credit in the event of a claim. If the client makes a claim against the bond, for example, you don't finish the work as agreed, then the surety bond company will pay the claim. You will now need to repay the bond company. As long as there are no claims, you do not owe the bond company and your business capital is freed up for other purposes.
What if a project goes longer than expected?
If you and the client revise the contract to allow for a project extension so there is no danger of a claim being issued, then you can extend your surety bond. To do so, you will need to check with the bond company to find out their extension protocol. Generally, you will need to make a renewal payment. There may also be a limited window for renewal before you will be required to take out a new bond instead.
For more help, contact a surety company in your area. Contact a company like NFP, P & C, Inc. for more information and assistance.