What makes some surety bonds more valuable than others? It can be more difficult to obtain small bonds than large ones.
One of a bonding company’s most important clients is the construction industry. These companies are the source for Performance and Payment bonds, which provide security for construction contracts. These are the most lucrative transactions for a bonding company (surety). Why would a surety lose a client by imposing strict terms on a small bond?
Contractors may require a variety of surety bonds. These include performance, payment, and maintenance as well as a bid bond, performance, price, and maintenance. Permit, permit, the court are just a few. We will explain why large bonds (large amounts of money) are more accessible to obtain than smaller ones, even for the same applicant.
This question is answered by the nature of the obligation and not the dollar amount. This can be illustrated by comparing a Performance bond with a Welfare or Wage bond.
Performance Bond
Construction contracts are covered by performance and payment (P&P) bonds. They promise that the applicant will complete the project according to the agreement and will pay all related bills for labor and materials.
Wage and Welfare Bond
Union contractors are those companies that employ union workers and require this type of bond. W&W bonds guarantee that the construction company will pay union wages as they are due and contribute to the union benefits plans, such as the pension or health insurance program.
It’s just not fair!
P&P bonds can range from a few hundred thousand dollars to tens of millions of dollars, while a W&W bond often costs less than $100,000. It is, therefore, easier to obtain the big one. It is easier to receive a $500,000 performance bond than a $50,000 bond union.
The nature of the obligation is the key to the answer – as well as the worst-case scenarios.
Let’s say the contractor goes out of business. The surety takes over the contractor’s shoes by providing a performance bond. They will need to make arrangements for the completion of the project according to the contract. As work progresses, the beneficiary of the performance bond (also known as the obligee or the owner of a contract) continues to pay the remaining amount of the contract amount. They now pay the surety who is performing the completion. This is the “unpaid amount.” The “unpaid contract amount” is what the contractor can rely on, even if he or she loses his/her money.
A union bond promises to pay future funds. This is the most challenging type of surety obligation. Underwriters will be able to look into their crystal balls, but we don’t have one.
It is not easy to guarantee the future solvency and financial stability of a construction company. If they’re wrong, the surety will not be able to make the union payments if the contractor doesn’t have enough money.
Q.Who is likely to pay the wage and welfare claim?
A. The surety (a net loss)
Some small bonds, such as supersedeas, wage, and welfare, release lien, or supersedeas, are complicated to obtain due to their challenging nature. The surety might give the same applicant a $300,000.000 performance bond, based on their credit history alone!
The bottom line is that it just ain’t fair. But we didn’t promise it would be because the obligations are different. This is more important than the dollar amount of a bond.
