Surety bonds in Michigan are similar to those offered in other states, but with terms and performance requirements specific to the businesses of the state of Michigan. They serve the purpose of being a kind of guarantee for a hiring organization that a contractor agreeing to do work for that organization will actually complete the work in a satisfactory manner.
The third party involved in Michigan surety bonds is a bonding company, which puts up a money guarantee in the event of contractor failure. However, there is a strong incentive for the contractor to perform up to expectations, because even though the bonding company would pay the initial claim amount to the dissatisfied hiring organization (often a government agency), the contractor would ultimately be required to reimburse the company. It would also be considerably injurious to the contractor's reputation to have defaulted on the terms of work specified in a bond.
What Is a Surety Bond?
In essence, a bond is a contract between the three partied mentioned above, a principal (the contractor), a hiring organization (the obligee), and the bonding company. The reason that these three parties enter into such an agreement in the first place is that the hiring organization generally requires it.
In the case of government agencies, they must have some kind of assurance that contractors actually deliver needed services in a competent and professional manner. Because of the number of contractors that any government agency generally works with, and because of the regulations it must follow in doling out work contracts, it is essential that there be some kind of guarantee of performance on work done. If any given contractor does fail to live up to the agreement terms, the agency is at least somewhat protected financially, and will not suffer from the contractor defaulting.
How Do They Work?
There is a similarity between bonds and insurance, in that one party would receive financial compensation in the event that the terms of the bond are not fulfilled by the contractor. The major difference between them and insurance however, is that the bond protects the customer rather than the contractor. For instance, if a city government hired an electrical contractor to wire a new office building, it might require that contractor to obtain one, which guaranteed fulfillment of the electrical work.
If shoddy workmanship were to be discovered after completion, the city agency would then have recourse to make a claim against the bond, up to the face value amount. In this scenario, it protects the city government group financially, it gives a contractor a better chance to be hired because he's backed by the bond, and the company benefits by selling the bond to a contractor. All three parties in the agreement derive benefit from the arrangement.
Kinds of Sureties
There are literally hundreds of different kinds of bonds used in business, and even though these vary from state to state, there are some general categories:
- Contract - these are the ones which a government agency or a construction project owner might require a contractor to obtain for the purpose of fulfilling work terms
- Commercial - are required of companies or business owners as a requirement of doing business, often as a condition of a state's licensing process
- Fidelity - usually involves protecting a business owner against fraudulent or dishonest acts by employees
- License and permit - required by some level of government as a condition of doing business within its jurisdiction
- Fiduciary - are required by the court of a fiduciary, i.e. someone in a position of trust who serves as a guardian or estate executor
- Public official - are required by law of people holding public office, as a protection against corruption or misbehavior
Industries That Are Required to Get Bonded in Michigan
There are many different industries which might require bonding from principals hired to perform work for them. The universality of a surety can be seen in the diversity of the industries requiring them: transportation, entertainment, construction, manufacturing, real estate, wholesale/retail, and the legal industry.
One of the biggest employers requiring one is the federal government itself. As a direct result of the Miller Act, which requires all contractors to obtain bonds guaranteeing performance as well as payment of subcontractors, sureties have become a condition of hiring for virtually all major jobs hired out by the government.
How to Get Bonded in Michigan
There are many companies which will sell bonds to contractors so they can fulfill hiring requirements of an obligee, and the process is fairly simple. When a contractor applies for one, a background check of the principal is usually conducted, so as to determine their professional qualifications, good work history, and financial stability. Assuming everything checks out, the actual bond is notarized to become a legal document, and is then issued to the applicant.
To obtain your bond, make us your first call. We can provide you with the one you need to obtain work and help your business grow, and we make the whole process as hassle-free as possible. Our team provides affordable surety and fidelity bonds. Each one is prepared on a specific form, as prescribed by the entity requiring the bonding. We look forward to getting started.