Surety

A surety is a licensed insurance or financial guaranty company that issues bonds, bid bonds, performance bonds, and payment bonds, on behalf of construction contractors, guaranteeing that the contractor will fulfill its contractual and payment obligations as required by the Miller Act and FAR Part 28.

What is a Surety?

Sureties are distinct from insurance companies in a critical way: when an insurer pays a claim, it absorbs the loss as a cost of doing business. When a surety pays a bond claim, it is acting as a guarantor on behalf of the contractor, and it then seeks full reimbursement from the contractor under the indemnity agreement both parties signed when establishing the bonding relationship. The surety is not taking risk; it is vouching for the contractor's ability to perform and pay.

The U.S. Treasury publishes Circular 570, updated annually, listing all sureties approved to issue bonds on federal construction contracts. FAR 28.202 requires that all bonds submitted on federal contracts come from Treasury-listed sureties. Each listed surety has an approved underwriting limit (the maximum single bond amount it can issue) and an aggregate capacity.

Before issuing bonds, sureties conduct thorough underwriting of the contractor: examining financial statements (typically three years of audited statements), credit history, backlog and bonding capacity in use, management team experience, equipment ownership, and bank relationships. The surety's decision to extend bonding capacity, and at what level, is one of the most rigorous credit assessments a construction company undergoes.

A contractor's surety relationship is a strategic business asset. The aggregate bonding capacity the surety extends sets the ceiling on the total value of bonded contracts the contractor can hold simultaneously. Growing companies must grow their surety relationship in tandem with their revenue, typically by delivering completed projects that demonstrate financial performance and by regularly sharing updated financials with the surety.

Why Sureties matter for government contractors

Without a surety relationship and established bonding capacity, a construction contractor cannot bid on most federal construction contracts. Developing and maintaining a strong surety relationship is as important as any other aspect of a construction contractor's business development strategy.

Example

A growing construction firm with $15M in annual revenue has maintained a surety relationship for five years. Based on strong audited financials and a clean claims history, the surety extends a single-project bond limit of $10M and an aggregate capacity of $25M. This means the firm can simultaneously pursue projects totaling up to $25M in bonded value, and can bid on individual projects up to $10M. The firm targets this capacity strategically, pursuing a mix of projects to keep aggregate utilization below 80%.

Frequently Asked Questions

How do I find an approved surety for federal contracts?

The U.S. Treasury publishes Circular 570 at fiscal.treasury.gov, listing all approved sureties with their underwriting limits by state. The list is updated annually. Contractors typically work with a surety bond agent or broker who has relationships with multiple approved sureties and can match the contractor with the most appropriate surety for their size and specialty.

Does having a surety relationship guarantee I can get bonds?

No. Having an established relationship is a prerequisite, but the surety evaluates each bond request individually against the contractor's current financial condition and aggregate capacity in use. A contractor whose financial condition has deteriorated may be declined bonds even with an existing relationship.

Can the SBA help small businesses obtain surety bonds?

Yes. The SBA Surety Bond Guarantee Program guarantees 70-90% of bonds issued to eligible small businesses, reducing the surety's risk and enabling them to extend coverage to contractors they would otherwise decline. The program covers bid bonds, performance bonds, and payment bonds on contracts up to $9 million ($14M for certain contracts).

What is a co-surety arrangement?

When a project's bond amount exceeds a single surety's underwriting limit or a contractor's established capacity with one surety, two or more sureties may join together as co-sureties, each sharing a portion of the bond obligation. Co-surety arrangements require coordination between the sureties and approval from the contracting officer.