Surety Bonds
Important Surety Bond Information for Alberta Businesses
A Surety bond is required if you are a licensed contractor in the province of Alberta and you are asking your customers to pay any money prior to starting a project.
This is called a Prepaid Contractors Bond and is usually quite quick and easy to obtain.
However, the process of bonding is not as simple as many people think. In fact, bonding is not technically a form of insurance. Bonding is an effective way to provide guarantees to people and businesses and here is important information to understand about the process, and why it is so valuable to businesses today.
Performance or Labour and Material Bonding is a Special Contract
Perhaps a someone wants a building constructed or a new parking lot built. If it is a government organization, they will put out tenders that local businesses can bid on. In addition, the government will want some kind of guarantee that the bidders can live up to their part of the agreement to perform and complete the necessary work. In fact, it is mandatory in many cases, these days.
So how can a business guarantee its agreement? It is done with the assistance of bonding or surety companies. The surety company uses its reputation of financial stability to guarantee the contract. Of course this is done for a fee. If for some reason, the business cannot perform the work, the surety company is the one that must reimburse the government (or whoever wants the work done). This is usually a certain percentage of the original agreement for payment.
The bonding company pays claims only after investigating them thoroughly. However, if you are bonded to an agreement, you must reimburse the surety company after it has paid the company you agreed to perform work for.
Why Must I Pay the Surety or Bonding Company?
You might be thinking what good is a surety company if I have to make good on the contract? The answer is quite simple. Bonding is not insurance, it is a guarantee that you will fulfill your obligations. So why pay the surety company when you could simply pay the government and avoid the fees? Here are some reasons to hire surety companies.
- No collateral needed – you might not have the money for bonding, and your surety company will not ask you for collateral. In fact, you could provide a letter of credit from a financial institution. Yet, this also comes with a fee and they will want full collateral, so the surety company may be the only option you have, if you want to land that lucrative contract for your business.
- Safety – there is an element of safety involved. For example, before your surety company pays any claims, they investigate them completely. This way, you only have to pay when there is a legitimate claim. If you put up cash or provided a letter of credit, you may not have this benefit.
Types of Bonding
Some of the most commonly used bonds are:
- Bid Bonds
- Performance
- Labour & Materials
- Prepaid Contractors Bonds
Surety Bond Advice and Assistance
There are many types of bonding situations for Alberta businesses to be aware of, and you need the right bonding company for your specific needs. A M Luken Insurance & Financial Services can help you get what you need.
A M Luken Insurance & Financial Services can provide you with a wide variety of commercial bonding options and we also offer specialty markets for three year bond agreements at special rates. To contact us for more information, call 403-225-5996.