Learn about the basics of surety bonds, the
role that bond producers play in suretyship, and how to find an
NASBP producer in your state.
are Surety Bonds?
Contracts of suretyship are known as surety bonds. Suretyship is
an ancient concept that has played a significant role in the
functioning of civilizations. Suretyship generally may be
defined as when one party guarantees performance by another party of an
obligation or undertaking. The party whose obligation is guaranteed is
called the principal; the party who guarantees
that the undertaking or obligation will be performed is called
the surety; and the party in whose favor the guarantee
is given is called the obligee. Many obligations are
guaranteed through surety bonds. Common types of surety bonds include
commercial surety bonds and contract surety
Public and private construction projects often require that
contractors furnish contract surety bonds. There are three basic types
of contract surety bonds, which are the following:
The bid bond assures that the bid is submitted in
good faith and that the contractor will enter into the contract at the
price bid and will provide the required performance and payment
The performance bond protects the owner from
financial loss should the contractor fail to perform the contract in
accordance with its terms and conditions.
The payment bond assures that the contractor will
pay specified subcontractors, laborers, and materials suppliers
associated with the project.
Most surety bonds in the United States are underwritten
by subsidiaries or divisions of insurance companies, and both
surety bonds and traditional insurance policies are risk transfer
mechanisms regulated by state insurance departments. However,
traditional insurance is designed to compensate the insured against
unforeseen adverse events. The policy premium is actuarially determined
based on aggregate premiums earned versus expected losses. Surety
companies operate on a different business model. Surety is designed to
prevent a loss. The surety views its underwriting as a form of
credit, much like a lending arrangement, and places its emphasis on the
qualifications of the prime contractor or subcontractor to fulfill its
obligations successfully, examining in-depth the contractor’s or
subcontractor’s credit history and financial strength, experience,
equipment, work in progress and management capability. After the surety
assesses such factors, it makes a determination as to the
appropriateness and the amount, if any, of surety credit.
are Producers and What Role Do They Play in
Obtaining surety credit starts with professional bond producers.
Arranging bonds and a line of credit with a surety company requires
extensive, detailed work for every bid that a contractor or
subcontractor submits. Each surety company has its own unique
underwriting standards and practices, and the prequalification
process to obtain surety credit can be a difficult experience if
not handled by a surety bond specialist. Surety bond producers are
licensed business professionals who have specialized knowledge of
surety products, the surety market, and the business strategies and
underwriting differences among sureties. A bond producer can
serve as an objective, external resource for evaluating a
construction firm's capabilities and, where necessary, can suggest
improvements to help the construction firm meet a surety
company's underwriting requirements. A bond producer also can
introduce the construction firm to other helpful professionals and
consultants, such as certified public accountants and attorneys, when
appropriate. Finding the right fit in bond producer and surety
relationships can be quite beneficial for the growth and
development of a construction firm.
In choosing a bond producer, construction firms should
consider the following information in their selection process. Please
note that the following questions or points are not exhaustive and are
intended merely to provide examples of possible questions to ask and
factors to consider when assessing whether a particular bond producer
might be a good fit for your company’s needs.
- Is the producer licensed in your jurisdiction and that of
- What is the reputation of the bond producer? Does he or she
have a reputation for integrity and respect in the industry?
- What percentage of his or her overall business are
- Does he or she have an understanding of the construction
industry and of the construction process, particularly the management
and administration of construction contracts?
- Does he or she possess knowledge of construction accounting
procedures, especially an ability to analyze financial statements,
work-in-progress, and cash flow?
- With how many sureties does the producer work?
- Is the producer specifically authorized to issue bonds on
behalf of sureties?
- Has the producer developed solid relationships with surety
- Has the producer developed solid relationships with other
professional service providers, such as attorneys, CPAs and lenders?
- How aware and interested is the producer in local, regional
and national construction markets?
- How active is the producer in local or national
construction associations, such as the American Subcontractors
Association, Associated Builders & Contractors, or Associated
General Contractors of America, and in local or national surety industry
associations, such as the National Association of Surety Bond
- Can the producer demonstrate a commitment to maintaining
frequent client contact through newsletters, site visits, or visits to
- What other services does the producer provide clients to
help them with their business needs?
Producer in Your State
Click here to
find a producer in your state. NASBP provides a complete listing of
members located throughout the United States, as well as Canada,
Mexico and Guam.