Chapter 4: Surety Bonds
4.1 Brief Introduction
4.1.1 What is a surety bond A surety bond is a guarantee. It is a three party agreement among the owner, contractor and surety entity. Under the terms of the bond, the contractor and surety guarantee to the owner that the construction project will be completed as provided for in the plans and specifications and construction contract.
The following words have the same similar meaning in expressing. Guarantee Letter of guarantee Bank guarantee Bond Security Seof surety bond
The bond is submitted with the contractor’s bid. If the bid is accepted by the owner, the contract must: (a) Enter into a contract. (b) Provide a sufficient bond for the performance of the terms. If the contractor fails to meet one or both of these requirements, the bid bond is forfeited. Depending upon the terms, the penalty assessed will be either the difference between defaulting contractor’s bid price and the next lowest price or the penal sum of the bond, whichever is less. Typically, the penal sum of the bond is either 5 or 10 percent of the contract price.
4.2 Relevant Requirements for Bonds in FIDIC Documents
4.2.2 Requirements for Performance Security in FIDIC Conditions of Contract
4.3 Common English for Bonds
(2) Performance bonds The performance is issued after a proposal has been accepted. It provides security in the amount of face value, which is usually the contract price. Its purpose is to guarantee the completion of the work in accordance with the plans and specifications and at the contract price. The wording of the usual form is simple. Essentially, it states that if the contractor faithfully performs all the conditions required, the bond will be null and void. And if not, the bond will come into effect.
(1) Bid bonds The bid bonds is the basic instrument of prequalification for many contract bids. Unless otherwise specified by the owner, the bond may be secured from any qualified bonding company, and its purpose is to validate the bid price submitted by the contractor to the owner.
There are a variety of bonds. The most common ones are bid bonds, performance bonds, labor and material payment bonds, combination performance and payment bonds, and supply bonds.
A surety bond is not an insurance policy. Although bonds and insurance may appear to be similar to the untrained eye, there are basic inherent differences in their function. The surety is a guarantor, not an insurer. The surety entity guarantees to the owner that the contractor will perform required obligations and that if not performed, the surety entity will do so. In essence, the surety bond is a credit device similar to a co-signed note for a bank. The basic theory of surety-ship, as in any case involving the extension of credit, presumes that there will be no loss.