In the contracting world, there are some myths about surety bonds. Do you really need one or is it just an added protection, for a costly price? This leaves the contractor with a decision to make: avoid the project or work without a surety bond.
Below we dispel some of these myths:
- The first misconception is that surety bonds are expensive! This tends to alienate many small businesses from bidding on projects that require surety bonds. Which in essence, loses them money. Usually, (depending on the credit score of the applicant), a bond premium costs between 1% and 3% of the contract sum.
- Another misconception is that surety bonds are not needed by large construction companies. There is also the misconception that there is a bias towards smaller companies. This is because, many think, that they are more of a risk or liability to award projects to. This myth is based on the idea that large companies won’t need to buy surety bonds because they can afford to have safeguards in place.
- Have you heard, from colleagues and friends, that all surety companies are equal? This is another misconception. A surety company draws its strengths from its years of expertise in the field, relationship with underwriters and personal customer service to their clients. The National Association of Surety Bond Producers is a great place to start when looking for a reputable surety bond producer. Another great source is the Treasury Listing of Approved Sureties.
- Insurance is the same, and just as good, as surety bonds. This is another false statement. The big misconception lies with a SDI (Subcontractor Default Insurance) as an alternative to a surety bond. (For more information, check out our blog on SDIs vs surety bonds). The difference between the two are numerous. A surety bond requires three parties. Whereas an insurance policy deals with only two parties. An SDI also insures the contractor and not the owner of the project or subcontractors or suppliers (who are usually most at risk). Surety bonds require more financial information when being applied for than SDIs. This ensures a more thorough evaluation of the applicant. Surety bonds also have a longer legal history than SDIs. Surety bonds, finally, offer more protection than SDIs because they are regulated and offer higher protection to all parties involved.
In summary, surety bonds are a necessity for any contracting company looking to obtain success and a profitable reputation.
- Surety bonds are affordable, often needing only 1-3% of the contract sum.
- Surety bonds are needed for all contracting companies, large and small.
- A surety bond is NOT the same from every company. The biggest difference relating to the expertise in the field of the surety bond producer, as well as their relationship with underwriters and loyalty to their customers.
- Insurance and surety bonds are COMPLETELY different entities.