By nature, construction is a risky business. An economic downturn, labor difficulties, material shortages, equipment problems, and a host of other problems can cause a contractor's business to fail—leaving projects at a standstill. That's why an increasing number of owners are requiring surety bonds from their contractors. A surety bond provides financial security and construction assurance on building projects by guaranteeing owners that contractors will perform the work and pay subcontractors, laborers, and material suppliers. The surety company allows its financial resources to be used to back the commitment the contractor has made to the owner. If the contractor defaults, the surety steps in to finish the job and sort out the mess.
But surety bonds aren't just for the owner's protection. They also benefit the contractor by preventing litigation, saving the contractor from financial ruin, providing payment to subcontractors, and funding project completion. Before issuing a bond, the surety must be satisfied that the contractor runs a well-managed, profitable enterprise, keeps promises, deals fairly, and performs obligations in a timely manner. Surety companies prequalify contractors by taking an in-depth look at their business operations.