What is a Surety Bond?
A surety bond is legally binding contract between a Principal, Obligee, and a Guarantor. In the transportation construction industry the Principal could be a Prime Contractor or a Subcontractor, the Obligee is the Project Owner, and the Guarantor is the Surety Company. This legally binding contract between the three parties protects the Obligee from loss if a Principal is unable to fulfill its contractual duties. A surety bond also protects the Principal from loss if it is unable to fulfill the contractual duties. If a Principal is unable to fulfill its contractual duties, the Guarantor will step in and compensate the Obligee in the amount of contractual work that still needs to be completed. This also protects the Principal from compensating the Obligee for its inability to fulfill its contracted duties.
Why Are Surety Bonds Important?
In the 1800s the United States was in an era of rapid infrastructure growth. At the time, there were no laws to ensure or promise payment to subcontractors performing construction work under a prime contractor. In 1894, Congress passed the Heard Act in an effort to provide a form of payment security. The Heard Act authorized, but did not make the use of surety bonds on contracts mandatory requirement.
To provide additional payment security for subcontractors, Congress passed the Miller Act in 1935. The Miller Act of 1935 made the use of surety bonds a mandatory requirement on all federal contracted projects starting at $100,000 and up. Today, the Federal Acquisition Regulations (government procurement regulations) requires surety bonds on federal projects $150,000 and up.
Types of Surety Bonds
Payment Bond – Guarantees a contractor will pay its subcontractors, suppliers, and laborer.
Performance Bond – Guarantees a contractor will perform its contractual duties in line with the standards set forth by the contract.
Bid Bond – Guarantees a contractor will execute a contract at the bid price and under the conditions of the bid.
How can the USDOT Help?
The USDOT has created the Bonding Education Program (BEP) in effort to educate and prepare small businesses to become surety bonded and participate on federal contracts. The BEP is a hands-on, multi-component program designed to address what businesses need to do to become surety bond-ready, as well as one-on-one sessions with local surety bonding professionals to help in assembling the materials necessary for a complete bond application. For more information of the BEP, please click here.