3 reasons why your business may need a contract surety bond

 March 29, 2022     UFG Insurance    Business   Surety  Read Time: 4 min

Laws, regulations and peace of mind—that’s why we do, or don’t do, a lot of things in life. 

Contract surety bonds are required by law in many instances. However, there are other reasons for bonding too. First, let’s level set: A surety bond is an agreement where one party (the surety) promises to answer for another party’s default to a third party. The three parties that make up a contract surety bond agreement are the principal (contractor), the surety carrier (UFG Surety) and the obligee (project owner).  

Now that you know how a surety bond agreement works, it’s time for the next step: why? Here are three reasons why your business may need a surety bond. 

1. Publicly funded projects

A contract bond is required for any federal construction contract valued at $150,000 or more, applicable to any federal, state or local level project. It is not uncommon for a construction project to run the length of several construction seasons, be a multi-step or phased process, and include change orders adding to or deducting from to the original contract amount. Contract bonds guarantee that the project will be completed on time, to the specifications of the agreement, and that participants are paid accordingly. Contract performance and payment bonds help to manage the associated risks. 

Performance bonds are just one of four common types of contract bonds.

2. Private development 

Owners of private projects are typically not required by law to purchase a surety bond. However, they may require a surety bond in the terms of their agreements. For example, a lender who is financing the private project may require a surety bond. The presentation of a surety bond is security and further substantiates the contractor’s ability as it applies to their performance and payment obligations. 

Want to learn more about the basics of surety bonds? Read our article: What is a surety bond?

3. Subcontractor requirements

Prime contractors often work with subcontractors (also known as subs) who are typically experts in their field or scope of work. A contract surety bond from a subcontractor to the prime contractor can be a key risk-mitigation tool. Subcontractor bond threshold requirements can vary from project to project. Some thresholds are put into place subject to crucial timelines for the project, the scope or nature of the work, or the amount of the subcontract. On the contrary, some general contractors may require all subs with a contract amount greater than a specific amount, let’s say $100,000 to provide a subcontract bond.  

There are a variety of reasons why your business may need a contract surety bond; these are what we’ve deemed as the top three. Reach out to one of our independent surety agents to get bonded with UFG Surety – a responsive, trusted and knowledgeable surety.  

The information provided is for informational purposes only. Every attempt is made to ensure that the information is accurate; however, it is not intended to replace professional advice. For more information, see Disclaimers & Other Legal Documents.