CONTRACT SURETY BONDS

What are Contract Surety Bonds?

Contract surety bonds are essential financial tools that provide performance guarantees for construction and building projects. They protect project owners by ensuring that contractors, also known as principals, meet their obligations, such as completing work on time and paying subcontractors, laborers, and suppliers. If a contractor defaults, the surety company steps in to ensure the project is completed and financial responsibilities are fulfilled. 

 
The primary parties in a contract surety bond agreement include:
  • Principal: The contractor who is responsible for fulfilling the contract.
  • Obligee: The project owner or stakeholder requiring the bond for protection.
  • Surety: The company providing the bond and guaranteeing the contractor's performance.

At Merchants Bonding CompanyTM, we bring over 90 years of experience in the surety bond industry. As a surety-only provider, we specialize in delivering reliable, tailored solutions to contractors, ensuring they have the support they need to succeed.

Why Are Contract Surety Bonds Necessary?

Contract surety bonds protect project stakeholders by guaranteeing that contractors will fulfill their contractual obligations. These bonds are often mandatory for public construction projects and are frequently required in private development projects to safeguard against financial risks.

Key benefits of contract surety bonds include:

  • Financial Security: Project owners gain peace of mind knowing their investments are protected.
  • Accountability: Contractors are held to high performance standards, ensuring quality of work.
  • Legal Compliance: Many public projects require bonds to meet legal and regulatory requirements.

Whether you're managing a government infrastructure project or a private development, contract surety bonds provide vital financial protection.

How Do Contract Surety Bonds Work?

Contract surety bonds act as a three-way agreement between the principal (contractor), the obligee (project owner), and the surety company, ensuring the contractor meets their contractual obligations.

Here's how the process works:

  1.  Prequalification: Before issuing the bond, the surety evaluates the contractor's financial strength, experience, and capacity to perform the work.
  2. Guarantee of Performance: The contract surety bond provides assurance that the contractor will complete the project as agreed.
  3. Claims Process: If the contractor defaults, the obligee can file a claim. The surety company investigates the claim and determines the appropriate course of action.
  4. Contractor Accountability: The contractor is ultimately responsible for reimbursing the surety for any claims paid.

By securing a contract surety bond, project owners gain peace of mind, knowing that their investment is protected, while contractors demonstrate their commitment to fulfilling contractual obligations.

Which Construction Projects Require Contract Surety Bonds?

Contract surety bonds are essential in the construction industry, ensuring project completion and protecting the interests of the project owner. Depending on the nature and scope of the project, bonds may be required for various types of construction, including:

  • Federal Projects: Projects funded by the federal government.
  • Public Projects: Projects funded by the state or local governments, such as road construction, school buildings, and public infrastructure.
  • Private Projects: Projects funded by private entities, such as commercial buildings, residential developments, and industrial facilities.

Who Needs Contract Surety Bonds?

  • General Contractors: The primary contractor responsible for overseeing the entire construction project. They typically secure a performance bond to guarantee project completion and a payment bond to ensure subcontractors and suppliers are paid.
  • Subcontractors: Specialized contractors hired by the general contractor to complete specific portions of the project.
  • Developers: Developers or contractors working on residential or commercial real estate projects may be required to provide a subdivision bond, also referred to as site improvement bonds, plat bonds, developer bonds, or completion bonds.

Merchants Bonding Company specializes in providing surety bonds to meet the needs of general contractors, subcontractors and developers.  

Types of Contract Bonds

Merchants offers a full suite of contract surety bonds tailored to meet the needs of contractors and project stakeholders:

Bid bonds

Bid bonds provide financial assurance that a contractor has submitted a bid in good faith, intends to honor their bid price, and will secure the necessary performance and payment bonds if awarded the contract. Learn more.

Performance Bonds

Performance bonds protect project owners from financial loss if a contractor does not complete the work as outlined in the contract's terms and conditions, ensuring the project is finished as agreed. Learn more.

Payment Bonds

Payment bonds ensure payment to subcontractors, laborers, and material suppliers involved in a project, providing financial protection and promoting trust in contractor obligations. Learn more.

Maintenance Bonds

Maintenance bonds provide assurance against defective workmanship or materials, ensuring quality standards are met and maintained for a specified period.

Subdivision Bonds

Subdivision bonds guarantee that a developer will complete public improvements to a subdivision, including sidewalks, streets, sewers, and other critical public infrastructure. Learn more.

Miscellaneous

Merchants offers a diverse range of bonds for contractors. Reach out to us to learn more.

How to Get a Contract Surety Bond  

Wondering how to obtain a contract surety bond? Follow these simple steps:

1. Find a Trusted Insurance Agent - Use our Find an Agent tool to connect with an experienced surety bond agent near you.

Find an Agent

2. Submit Required Documentation -The underwriting process involves evaluating the contractor's stability, credit history, and experience. Be prepared to provide:

  • Financial statements
  • Project details
  • Work history

3. Pay the Bond Premium - Contract surety bond premium is typically calculated by taking a small percentage of the total contract value with a rate that's dependent on the contractor's financial strength and project specifics.

4. Receive Your Bond - Once approved, the bond is issued and ready to be filed with the obligee.

What Happens in a Contract Surety Bond Claim?

When a contractor defaults on their contractual obligations - such as failing to complete a project, going bankrupt, or neglecting to pay subcontractors - the obligee (project owner) can file a claim against the surety bond. The surety bond company steps in to address the issue by:

  • Facilitating Project Completion: The surety company may coordinate with the contractor or hire a replacement to ensure the project is completed.
  • Providing Financial Compensation: The obligee may be reimbursed for losses caused by the contractor's failure.
  • Supporting Resolution Efforts: In some cases, the surety works with the contractor to remedy the problem and fulfill the contract.

When the surety provides a financial safety net, the contractor remains legally obligated to reimburse the surety for any costs incurred during the claims process. This ensures the contractor is held accountable for their obligations.

Why Choose Merchants for Your Contract Surety Bonds?

The Merchants Difference

Merchants Bonding Company knows that being reliable, efficient, and providing great customer service matters most. We are known in the industry for our surety expertise and accessibility to company personnel, along with outstanding innovation and technology to streamline bonding. At Merchants, we focus on providing quick access to our underwriting teams and easy-to-use online tools.

First Class Experience

As a surety-only company, we've sharpened our skills to offer same-day service for new submissions and bond requests. Each account has a dedicated underwriting team ready to help.

Common Sense Underwriting

We don't use strict formulas. Merchants was built on a personalized approach, looking at each account individually to find the best solution for every client.

Industry-Leading Website

At Merchants Bonding Company, we make issuing bonds simple and fast. Our online tools, like the Merchants Bonding Company HubTM and Rapid Access Program (RAP), are built with agents in mind and designed to save you time. The Hub's intuitive interface makes finding bond forms, uploading documents securely, and making online credit card payments effortless. It's no wonder agents consistently give us five-star reviews for ease of use and reliability.

Capacity

Merchants is a top 10 surety writer with the ability to cover a wide range of contract bonds - from small single bonds to multimillion-dollar accounts. We have been rated "A" (Excellent) or better by AM Best since 1958, proving our reliability.