Key Players

Abstract

Many industry professionals believe that surety bonds are the foundation for a competitive, properly functioning bidding system. In competitively bid contracts where the owner awards the contract to the lowest responsible bidder, surety bonds help ensure that all bids are in earnest and the selected contractor will perform to the specifications outlined in contract documents. Surety bonds serve as evidence of the contractor's competence and capability. They also guarantee that suppliers of labor and material have some recourse against financial loss that stems from contractors who fail to fulfill their obligations. On projects requiring bonds, suppliers and specialty contractors (subcontractors) will generally remove any allowances for extra funds they may have factored into their quotes to cover the risk of not receiving payment for materials or services. Another significant benefit is the presence of an impartial third party who extensively investigates and evaluates the qualifications of a contractor prior to contract award. Owners should keep in mind that the surety underwriter has access to financial data that contractors rarely release to project owners. Therefore, as a practical matter, surety bonding can be extremely beneficial to the owner. The underwriting evaluation process receives further attention later in this book.