Surety bonds are crucial when using outside contractors

By Kirk Bantz, Oswald Companies

The convergence of technology, global supply chains and real-time communication has made it possible for companies to focus on core competencies by outsourcing projects and operations that do not directly generate earnings.

Firms that outsource such back-office functions as accounting or human resources can invest more resources into profitable activities. Using outside contractors presents numerous strategic and competitive advantages.

However, when an outside contractor’s work is mission-critical, organizations should strongly consider mitigating contractor risk with surety bonds. Contractor failures average 10,000 per year in the U.S. – producing estimated annual losses in excess of $3 billion.

Surety bonds, an obscure part of the insurance industry, are a time-honored solution for managing outside contractor risk. Historically, the largest users of surety bonds are government entities that require bonds to guarantee all but the very smallest public-private contracts. However, private sector businesses of all sizes are turning to surety bonds for guarantees against contractors’ failure to perform.

There are three basic types of surety bonds:

• Bid bond. Assures a project owner that a contractor is qualified to perform the work, submits a bid in good faith and will enter into a contract at the bid price
  
  
• Performance bond. Protects a project owner from financial loss should the contractor fail to perform the contract in accordance with its terms and conditions
  
  
• Payment bond. Assures that a contractor will pay all subcontractors, laborers and material suppliers associated with the project

Besides relieving the project owner of financial risks, the biggest benefit of obtaining a surety bond is that it verifies the contractor is capable and financially able to complete the job.

Kirk Bantz is a representative from Oswald Companies, the insurance advocate for OSCPA. Kirk can be contacted at kbantz@oswaldcompanies.com or 614.246.8504.

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