A Surety Bond is a contract of Surety; made between parties where one party has a contractual obligation to the other to provide a service &/or complete an undertaking of a contract.

A claim under a Surety Bond would usually be made where the ‘service providing party’ defaults on their contractual obligations to the other party. The other party can then seek compensation under the agreed terms of the Surety Bond.

Ie: a property developer ‘PD’ engages a builder ‘BD’ to build a block of apartments at a set price and in a set time “the project”. The BD completes only half the project in the set time and as a result the PD refuses to make further payments to the BD. The BD goes into bankruptcy and cannot complete the project.

The PD can then call on the Surety Bond which, if drafted properly should pay the PD enough monies in order to complete the project.

A Surety Bond is irrevocable and non-cancellable and while not a bank guarantee; a Surety Bond can provide the same level of protection as a bank guarantee without the need for the ‘service providing party’ to tie up their assets by pledging such for a bank guarantee.   

Surety bonds are designed to deliver flexible and affective bonding protection alongside traditional banking lines of credit – but in many ways they’re better because Surety Bonds allows the ‘service providing party’ to free up funds, reduce debt and/or tender for additional contracts.

Due to the increasing popularity of Surety Bonds, there are a growing number of Bond Issuers offering products and services into the market place. In some countries, even individual states and regions, Surety Bonds can only be issued by insurance companies.
Depending on the type of Surety required there may be a number of alternative solutions available; however most Bond issuers are insurance companies with locations in this jurisdiction.

Depending on our client’s needs and the terms, conditions and limitations available from local Bond issuers it sometimes becomes necessary to use overseas facilities. Certainly, Surety Bonds can be issued on a Trans-Tasman basis between New Zealand and Australia and can be tailored to meet the objectives of all parties of the Surety issued.

Thus, it is important to have Surety Bonds facilitated by an expert in this field such as RGIB’ as there are wide variances in the different products available, and some of the Bond issuers aren’t as reliable or fast acting as others.

The need to provide guarantees to secure performance and other security requirements can be a major obstacle for many contractors tendering for projects.

In many cases a contractor may have already pledged all available security to a financial institution to undertake a project and in doing so used up all their capacity to provide the guarantee; whereas Surety Bonds do not normally require the contractor to pledge assets as is usually required with bank guarantees.

The real advantages of a Surety Bond can be easily demonstrated using this simplistic example:-

A contractor with a net worth of $3 million winning a contract for $30 million and being required to lodge a Bond for $3 million (10% of the contract value). Traditionally a bank would require the contractor to either place $3 million plus on deposit or effect a mortgage/debenture over assets of similar value. As Surety Bonds generally do not require tangible security, your assets remain unencumbered, but more importantly, working capital is released to fund future contracts. This can be a make or break situation.

Surety bonds are designed to deliver flexible and affective bonding protection alongside traditional banking lines of credit – but in many ways they’re better because Surety Bonds allows the contractor to free up funds, reduce debt and/or tender for additional contracts.

Some additional benefits of Surety Bonds are;

• bond facilities are unsecured [no tangible security required] versus a bank’s secured position [you having to put up money or pledge assets];



• bond facilities allows greater financial flexibility by allowing you to leverage your capital base by better utilising your assets or balance sheet provisions thus, enhancing working capital and liquidity opportunities; and



• better funding flexibility and options by not having to utilise your current banking lines for contingent liability purposes – no lazy capital.

Surety Bonds can be used for just about any purpose where one party has a contractual obligation to another party. RGIB Insurance Broking provides arranging Surety Bonds for just about any quantifiable purpose; the most popular Surety Bonds are issued for;

Contract Bonds - are primarily used in the construction and infrastructure sectors to cover performance obligations which can include a wide variety of contractual and performance risks including;

• Performance Bonds - provides security to the beneficiary against contractor non-performance or default, and supports contractor obligations.



• Bid Bonds - supports a contractor's bid or tender to ensure that they can enter into a contract if accepted.



• Advance Payment Bonds - secures the beneficiary's position on funds advanced to the contractor for capital purchases or site preparation.



• Retention Release Bonds - provides security to the beneficiary when the contractor is advanced funds from the retention fund.



• Maintenance Bonds - Secures a contractor's post-completion obligations during the warranty or latent defects period, usually 3-12 months post-completion.



• Off-Site Material Bonds - If goods or materials are held off site and paid for by the beneficiary, the bond responds if the goods or materials are not available when required for use in the contract.

Rental & Lease Bonds – are primarily used by Landlords to guarantee rental from commercial and industrial properties; should the tenant default on the rental payments, the bond will pay the ongoing rental commitment under the lease for the period agreed in the Bond.

The financial failure of a tenant can cause significant loss to a landlord because of;

• loss in terms of the time it takes to pursue the defaulting tenant;
• the time to find a replacement tenant;
• loss of rental in the interim period;
• outgoings which still need to be covered;
• loss in investment value while the property remains vacant;
• legal costs.

  An additional benefit of a Rental & Lease Bond is that it effectively removes a landlord’s need for personal guarantees which are often problematic. In some instances a potentially good tenant walks away from a rental due to the insistence on a personal guarantee or bank guarantee which can be unnecessarily prohibitive and expensive.

Property Deposit Bonds – are designed to take the place of a cash deposit when purchasing a property; these types of bonds are primarily used by a property purchaser to guarantee the property vendor the value of the deposit without the need for the purchaser to actually pay the deposit in cash – this helps free up capital otherwise required to be pledged as security for a bank guarantee or similar cash facility from a financial institution.

If the purchaser defaults on its settlement obligations, the vendor can call up the value of the deposit ‘bond’.

This type of bond is particularly useful in situations where the property is still under construction. The vendor is able to secure the sale up-front and the purchaser can avoid having large sums of money tied up for a potentially lengthy period of time – indeed, most Deposit Bonds are issued for up to 36 months, for between 10–15% of the purchase price.

This is a great way for property vendors, developers and project financiers to appeal to larger selection of property investors and purchases as it is a substantially cheaper option than using a bank facility of similar arrangements with a financial institution.

Every client’s needs are unique; that’s how RGIB views things because that way we make sure you don’t just end up with a “one size fits all” product; so to speak.

In almost all cases, the Surety Bond will be linked to a ‘contract’ which specifies the obligations of each of the parties.
Once we determine the best solution for your needs, we’ll arrange to send an application to a Bond issuer who will assess your application, taking into consideration the following qualities:

• a well developed core business
• an undoubted solid track record
• evidence of professional control and management of business operations
• adequate liquidity necessary to support the business
• a policy of capital growth and retention within the company
• technical ability to successfully undertake the specific contracts for which contract Bonds are required
• well managed exposure to existing projects

The Bond issuer will also want to be assured of the Bond owner’s financial standing because, in the event of a claim under a Surety Bond, the issuer will seek a 100% recovery from the Bond owner through a ‘Deed of Indemnity’

Before a Surety Bond is issued, the issuer will require an indemnity agreement from the Bond owner which sets out the issuer’s rights in the event of a claim.

Although the Bond issuer effectively takes over the primary obligation to pay the principal, they retain the right of recourse to the Bond owner in the event of a claim under the Bond.

This means, the issuer will seek a 100% recovery of the monies paid under the Bond, from the Bond owner; this is the purpose of the ‘Deed of Indemnity’. It doesn’t affect the reliability of the Bond to pay; it is a separate agreement between the ‘service providing party’ [owner] and the other party [principal].

A bank guarantee works on the same principal however; the bank has the Bond owner’s assets already and can recover their costs from those assets. Therefore a bank has no risk whereas the risk adopted by the Surety Bond issuer is the credit risk, if they are unable to recover funds from the Bond owner.

The level of complexity for the Surety required will be the key driving factor behind the fees.

As mentioned earlier; in almost all cases, the Surety Bond will be linked to a ‘contract’ which specifies the obligations of each of the parties – thus, it is usually necessary to have legal advice in regard to the Surety and the terms of its affect.

This is a cost that the applicant will have to bear; and it will no doubt depend on the size, scope and complexity of the contractual obligations for which Surety is sought. 

If the contractor is undertaking various similar projects, a Surety Bond template can be created that may, with some adjustment, be used again and again thus, potentially reducing on going legal costs.   

RGIB will charge an application fee equivalent to 2.5% of the Surety applied for; however, where clients require multiple bonds for multiple projects application fees will be reduced to 1.25% of the Surety applied for on each occasion.

If a Surety Bond is issued, RGIB will charge a brokerage fee equivalent to 2.5% of the Surety issued; however, where clients take out multiple bonds for multiple projects brokerage fees will be reduced to 1.25% of the Surety issued on each occasion.

RGIB will earn a commission for its services in arranging the Surety Bond. That commission will be paid by the Bond issuer and will, in part, depend on the complexity of the contract and Surety required. The commission will be disclosed in the final documentation of the Surety Bond if issued.

Yes, because Surety Bonds are irrevocable and non-cancellable thus, all premium, duties and costs are payable prior to the issue and effect of the Surety Bond.

The Surety Bond market generally won’t issue a Bond that has a Surety period of more than five (5) years.

This depends on the complexity of the contract to which the Surety applies however, in most cases a bond can be arranged within 7 working days from the time the application, with the necessary supporting material, is provided to the Bond issuer.

Once a facility has been established a Surety Bond can in most cases be issued and delivered within 24 to 48 hours.

Every day more and more companies are realizing the benefits of Surety Bonds.
With the right information and supporting material we have found that companies will accept Surety Bonds in lieu of bank guarantees.

Indeed, Surety Bonds are widely accepted by Government departments and their respective agencies. 

It’s easy; firstly, you should contact RGIB either by phone, email or fax. Once you make contact, we’ll provide you the necessary application documentation – if required one of our staff will come to see you and help complete the application; or we can arrange a video call such as on Skype where it’s just like having a meeting in person.

RGIB Surety Bond staff are well versed in Surety & contracting issues and have streamlined the application procedures to ensure a quick turnaround time.