Bonds are issued every day by the federal government and corporations in order to raise funds for projects and investments. Bonds are also issues by state governments needing funds for constructions and other infrastructure projects.
Government agencies require surety – or construction – bonds prior to accepting bids for projects. Surety bonds are also common requirements for private projects, and a contractor who can not get bonded may have problems finding projects to work on.
A Surety Bond is an agreement between three parties, where the Surety agrees to uphold a contractual obligation made by the primary person or business entity that will be performing the obligation, if the principal fails to uphold its promises to the obligee. The valuation of the Surety Bonds will depend on the cost of the projects as well as additional factors.
The financial help center at online brokerage ETrade can assist you with understanding and utilizing Surety Bonds to insure your projects and grow your construction business.
Valuation Of Surety Bonds: What Are Surety Bonds
There are three parties involved in a Surety Bond – the Surety, the obligee, and the principal. The principal is the person or business who will be performing the contractual obligation. The obligee is the party who is the recipient of the obligation, and the Surety is the party that guarantees that the obligations of the principal are performed. Sureties are similar to – and often divisions of – insurance companies.
A Surety Bond is provided to demonstrate the credibility of the principal and to ensure the performance and completion of the project specific to the terms of the contract. Surety bonds are an extra incentive to do business with a principal.
In order for a contractor to bid on a project, the General Contractor must provide the owner of the project a Surety Bond for its performance of the terms per the contract agreement. It is relatively easy to figure out the valuation of Surety Bonds, as they are based of the total amount of the project.
Valuation Of Surety Bonds: Calculating Surety Bond Values
The first step in determining the valuation of Surety Bonds is to calculate the contract amount. This is an insurance policy for the amount of work that that will be done. You can refer to the contract price on the RFQ – request for quote – if the bond is for a project. This amount is what needs to be insured.
The next step is to determine the range of costs, which rage in construction projects from .5% to 2% of the amount of the contract. The next step is to multiply the cost of the project by the percent cost for an estimate of total cost.
For example, if the bid is for a project that costs $100,000, then the price of the bond will be anywhere from $500 ( $100,000 x .005) to $2,000 ($100,000 x .02).
Surety bonds can mean the difference between getting a job and not getting a job, as many private projects will look for a bonded contractor, and you must be bonded to bid on government jobs. For more information and regulations visit the Help Center at ETrade, or call their trained specialists to help with your Surety Bond needs.
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