You’re a good and trustworthy person. When you shake hands and sign on the dotted line, your word is as good as gold, you can be counted on to get the job done. Who doesn’t know that, though, is the owner of the project whether it is construction, manufacturing or delivery. That’s where surety comes in.
A surety is a third-party entity that puts up a guarantee assuring that you’re going to fulfil the contract, they will make things right and make sure the job gets done as promised if your company fails. The surety business exists to give peace of mind to those who don’t relish that element of danger in their dealings.
The concept of surety is thousands of years old and is used worldwide protecting companies and governments from the very small projects such as delivering a container of waste plastic to the very large, expansion of the Panama Canal.
Surety bonds come in all shapes, sizes and colours. The various types of surety bonds have the surety concept in common, but they serve different purposes and audiences, you’d run out of fingers trying to count the different types of bonds. In general, though, know that contract bonds are what are typically purchased to guarantee construction projects, while commercial bonds guarantee obligations far from the construction site.
The most common are for the construction industry:
Advanced Payment Bond
This kind of surety guarantees that a principal who is given an advanced payment won’t just abscond with the money and will use the funds for the purpose for which they were advanced.
Performance Bonds cover performance of the terms of a contract. These bonds frequently incorporate payment bond (labour and materials) and maintenance bond liability. This protects the owner from financial loss should the contractor fail to perform the contract in accordance with its terms and conditions.
A bond which provides protection in the event that a person or entity does not restore land, that it has mined or otherwise altered, to its original condition.
This replaces the need for the employer to retain the final element of payment from the contractor during the maintenance/warranty period.
Other Industries use:
Bonds which provide financial assurance that the bid has been submitted in good faith and that a contractor will enter into a contract at the amount bid and post the appropriate performance bonds. These bonds are used by owners to pre-qualify contractors submitting proposals on contracts.
Deferred Consideration Bond
Provides protection when selling an asset for payment over an extended period. An example would be selling a business or property where payment will be made over a number of years.
Duty Deferment Bond
Allows you to import goods and delay payment of the duty for an extended period, to relieve pressure on your cash flow.
Gives security to the property owner that the tenant can pay their rent.
Supply Bonds cover performance of a contract to furnish supplies or materials. In the event of a default by the supplier, the surety indemnifies the purchaser of the supplies against the resulting loss.
The above are just a sample of what’s available, there are many different types and in really complex cases will even be bespoke.
Although surety bonds are not insurance the protections that come from surety bonds come at a price, buyers do need to pay premiums to acquire the bond just as they do when purchasing insurance. The cost of these premiums varies depend on the project, the protection required and the risk assessment of the applicant.
Underwriters will focus on 3Cs: character, capacity and capital when examining a contractor or other applicant:
Character: Character refers to personal qualities of honesty and integrity
Capacity: In the surety underwriting world, this refers to the company’s ability to handle all of the work on its plate
Capital: Another underwriting term, this basically refers to money. Does the principal have enough of it within reach to fulfil its obligations and not go under?
Surety has been a common practice for some time in Ireland mainly within the construction Industry. But due to the downturn, Irish companies expanding further afield and the increase in direct foreign investment the requirement for surety bonds in other areas is increasing. This is mainly due to the fact that surety is a requirement in many other countries especially in the US.
It is my opinion that surety bonds is a completely underutilised form of protection in Ireland and if used in the correct manner could help secure contracts for Irish companies giving them a competitive advantage over other bidders. By utilising a surety over a bank guarantee or letter of credit they are also freeing up their credit lines, this allows for better use of financial resources elsewhere.
Colm McGrath, Managing Director, Surety Bonds. An independent bonding intermediary.
Surety Bonds, Insurance House, Main Street, Carrick on Shannon, Co. Leitrim.