The process starts simply: A construction company needs a bond in order to acquire a new project. So they contact their agent who surveys the market and seeks a surety that will support the account and provide favorable terms. There are a number of beneficiaries of this transaction:
The bond agent and agency earn a commission on the transaction. These revenues not only provide the basis to pay the agency’s sales and administrative staff, they also form a production base that enables the agency to attract more sureties and additional bond clients. It is a key to their current and future prosperity.
Bonds enable contractors to acquire new work – the lifeblood of their business. The newly issued bond not only provides a profit making opportunity, it also helps build the company’s track record of projects completed under bond. This is a higher standard of performance than unbonded work because of the additional scrutiny by the surety, paperwork and reporting requirements, and related activity such as accounting and legal requirements.
Having a surety and performing bonded work helps the contractor acquire future work and additional bonds. It is a building process and an important part of the company’s credentials.
Some obligees, such as public bodies (city, state and federal contracts), are required to obtain bonds because of their beneficial effect. They are an effective way to protect the public interests. Other obligees such as owners of commercial property or general contractors may choose to bond their projects. The advantages are numerous.
From the outset, the obligee has a pre-qualified contractor on the project, a better contractor. Sureties only issue bonds after making a thorough evaluation. The bond protects the obligee from the contractor’s failure to perform and from non-payment of subs and suppliers – and those potential claimants are equally protected. Bonds are required on public work because they are such a great means of assuring the correct performance of the project.
For the surety, issuing the bond means incurring a risk and earning a fee. This is, of course, the surety’s business. It is the purpose of the company to identify and issue bonds that meet with their underwriting requirements.