Readers: I have a guest blogger explaining the basics of surety bonds today. I think she does a nice job of presenting the info concisely.

If you’re like most construction professionals, you’ve probably heard about surety bonds but don’t know much about how they work, why they’re required and how you can get them. To help you along your way, this article will summarize three crucial aspects of contract surety bonds.
1. How they work:

To put it simply, contractor bonds guarantee that a certain quality of work will be achieved when construction professionals work on projects. Each bond that’s issued functions as a legally binding contact that brings three entities together.

1. By purchasing the bond as a guarantee of future work performance, the contractor becomes the bond’s principal.
2. By requiring the bond to prevent financial loss, the government agency or project owner becomes the bond’s obligee.
3. By backing the bond with a financial guarantee, the insurance company becomes the bond’s surety.

If a bonded construction professional fails to fulfill the bond’s terms, then the bond amount can be used to keep government agencies, project owners and consumers from losing their investments in a project.
2. Why you may need them:
The federal Miller Act requires all contractors to purchase surety bonds before they can be granted permission to work on publicly funded construction projects that cost $100,000 or more. Other state, county and city regulations have their own unique contract surety bond requirements. No matter why they’re required, most construction projects require three different contract bond types.

• Bid bonds guarantee that contractors won’t increase their bids after contracts are awarded.
• Performance bonds guarantee that contractors will complete projects according to contractual terms.
• Payment bonds guarantee that contractors will pay for all materials and subcontractors used on a project.

3. How you get them:
Before getting bonds, construction professionals must undergo a strict application process that includes a thorough review of financial credentials and work histories. Contractors should work with surety providers that can fully explain all material clearly.

Surety bond premiums vary for a number of reasons, but contractors who have poor credit typically pay much higher rates for their bonds. Construction professionals who cannot qualify or afford to pay for the required contract bonds they need will not be awarded projects.

Although the bonding process can seem confusing at first, it successfully regulates the industry, limits fraud and keeps unqualified individuals from working in the market.

Danielle Rodabaugh is the chief editor of SuretyBonds.com, a nationwide surety bond agency. Danielle writes articles that help construction professionals understand the legal implications of surety bonds as well as the bonding process. You can keep up with Danielle on Google+.