The surety company expects the contractor to perform its contractual obligations under the bond. Surety companies usually require a demonstration of commitment from the construction company's owners through personal and/or corporate indemnity.

The indemnity agreement obligates the named indemnitors to protect the surety company from any loss or expense caused by the contractor's failure to fulfill its bonded obligation on the project(s) and any resultant loss under the surety bond. This gives the surety company some assurance that the contractor will stand fast in the face of problems and use its talent and financial resources to resolve any difficulties that may arise in the performance of the bonded work.

Surety bonds stand behind the commitments undertaken by a contractor through a bonded contract. The contractor is primarily responsible to fulfill the contract's obligations and the surety's obligations are secondary to the contractor's. Surety bond premiums are service fees for the surety's expertise, underwriting services, and financial backing.

After the bonds are written, the surety continuously evaluates the overall performance and financial position of the contractor. Adverse changes may cause the surety to reduce or terminate the bonding program, whereas positive results may serve as the basis for an increase in surety capacity.

Sufficient lead time should be allowed when seeking surety bonds-especially when seeking a bond for the first time. In no event should a bid be submitted for a bonded project before surety arrangements are in place.

Next: Maintaining the Surety Relationship