Basic Facts for Those Who Need Virginia Surety Bonds
If you are someone who discovers they require Virginia surety bonds, you can take comfort from the fact that many who find themselves in the same position also find themselves confused. After all, just what is a surety bond? What does it involve? Let’s take a few minutes to better understand the basics of surety bonds, and then explore how VA surety bonds may protect your interests.
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What Is a Surety Bond ?
The U.S. Small Business Administration, or SBA, defines the surety bond in this way: “A surety bond ensures contract completion in the event of contractor default.” Now, initially, that might not seem all that helpful as far as definitions go, but once you understand the actual structure of the surety bond, it becomes clearer.
Thus, it is better to look at a broader definition of it, and think of a surety bond as a contract that exists to ensure that all obligations are met between
- The agency or individual in need of the bond (the principal)
- The agency or individual requiring the bond (the obligee)
- The agency providing the bond (the insurance company)
So, let’s say that a contractor (the principal) wins a contract from a project owner (the obligee). The project owner requires their contractor to provide them with a surety bond as a form of protection should they default on the work they are supposed to do or complete. Should that contractor fail to meet the terms of the contract, the agency providing the bond will have to either compensate the project owner for losses incurred by that contractor’s failure, or find another contractor to complete the work or contract as indicated.
Does this mean that it is basically a form of insurance for the obligee? Yes, that’s fair to say as they are the direct beneficiaries and can make claims if the bond’s conditions are not met. Yet, it is also considered a form of credit extended to a principal as they will be obliged to repay the insurance company (also known as the surety) if a claim is made against the bond.
In most instances, the obligee is a government agency, and a surety bond exists to protect that agency. The government agency often requires all contractors to pay for the bond, but may reimburse costs associated with them at successful completion of a project.
In that light, a surety bond makes a lot of sense and it may be surprising to how often they are misunderstood. And this is not helped by the fact that they differ from project to project. Actually, there are four types of bonds; let’s learn a bit about them now…
The Types of Virginia Surety Bonds
Surety bonds come in several styles, and will vary based on the needs of the project.
- Bid bonds – These are to ensure that any bidder on a specific contract will in fact enter into that contract and supply the funds for the surety bond (usually a performance bond) if given the contract.
- Payment bonds – These are in place to guarantee that subcontractors and suppliers receive the agreed upon payments for any work done under the contract.
- Performance bonds – These are put in place to ensure that the contract is going to be completed in strict accordance to the conditions and terms the contract has outlined. This can also be called a contract bond.
- Ancillary bonds – These ensure that all requirements not related to performance within the contract are met.
- Commercial bonds – These are a bit unusual in that they are more general and are often necessary for a business or individual to obtain or maintain specific permits or licenses. They are also described as annual bonds because they require renewal. They are also called license bonds and permit bonds.
- Fiduciary bond – Another type of surety bond is the fiduciary, also known as a probate, administrator, executor or guardianship bond. It is insurance for beneficiaries and creditors if the fiduciary fails to perform competently or honestly.
As we can see, not all surety bonds relate specifically to business dealings, though a vast majority of surety bond buyers are purchasing for contractual reasons. Now, if you are someone who has discovered they require Virginia surety bonds, it is likely that you have won or are considering a contract for some sort of federal project in the state of Virginia. If so, it is likely that the contract is going to be valued at roughly $150, or more, and you may require several of the bonds outlined above.
However, don’t be surprised if you are seeking a contract for a state, municipal or private contract and see a surety clause or two in the terms. As the SBA reminds us, “Many service contracts, and occasionally supply contracts, also require surety bonds.”
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Is there any alternative to the surety bond? That is a good question, and depending upon the needs of the obligee, you may be able to use methods such as providing the obligee with cash or putting up 100% collateral for the value of the contract. This, however, is not wise as it decreases your liquidity and capital, costs far more than any surety bond premium, opens you up to risk of false claims (in which the obligee may decide to use the cash for a claim), and also puts you at risk for potential bankruptcy if you default.
In the end, surety bonds make a lot of sense if you are the obligee or the principal. As the principal, the bond says that you are good for any claims that may come from the contract. As the obligee, it ensures your project is completed without any losses. Choosing the right surety provider is also significant, and this is true whether you need Virginia surety bonds or bonds in other locations. Call NFP Surety today and learn how to get bonded in Virginia. It’s what we do!
NFP Surety provides affordable Virginia surety bonds and fidelity bond insurance. Every VA surety bond is prepared on a specific VA bond form, as prescribed by the entity requiring the bonding (known as the Obligee). Below is a list of surety bond types that are commonly requested in Virginia.
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If you prefer, you may download an application to complete and fax or email to our bond agency for processing. Let us show you how easy it is to get bonded in Virginia. Any Surety Bond Virginia type!
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