Surety bonds

What is a surety bond? 

A surety bond is a type of guarantee that provides a buyer with assurance that the terms of a contract will be fulfilled. In the context of exporting, it is a legal agreement between three parties: the principal (exporter), the obligee (buyer) and the surety (bond provider). If the exporter fails to perform its contractual obligations, the bond provider will compensate the buyer for any losses or damages up to the bond amount.

There are many different types of bonds, including advanced payment, performance, warranty and surety bonds. These bonds are commonly required for public works projects such as construction, engineering and environmental services. Surety bonds are commonly required for contracts with a US entity (including works that occur inside and outside the US). 

Key features of surety bonds to be aware of:

• the issuer of a surety bond must be on the US Treasury Department’s approved list. Australian businesses cannot obtain a surety bond from their local bank. See the list of certified companies here.
• surety bond requirements include two separate bonds:
  • a performance bond – covers contract performance obligations (similar to an Australian standard bond).
  • a payment bond – ensures payments to suppliers and subcontractors.
• each bond typically needs to cover 100% of the contract’s face value, meaning businesses bidding for US contracts must secure bonds totalling up to 200% of the contract value, on top of other requirements outlined in this article.

How does a surety bond work? 

A surety bond works like a form of credit and places the full risk on the principal. For an Australian exporter, the bond provider guarantees its performance to the buyer.

If you have been asked to provide a surety bond, you need to apply to a surety bond provider. During this process, the provider will assess your financial capacity, credit history and technical ability to deliver on the contract. The surety will also review the contract terms and conditions and the bond requirements. If the surety approves your application, you will need to pay a premium (a percentage of the bond amount) and sign an indemnity agreement, which obliges you to repay the surety in case of a claim. 

The surety will then issue the bond to your buyer, who will hold it as security until the contract is completed. If you fulfil your contractual obligations, the bond will be released, and no further action will be required. However, if you default on your contract, your buyer can make a claim to the bond provider, who will investigate the claim and pay the buyer if the claim is valid. The bond provider will then seek reimbursement from you, which may include legal fees and interest. 

Bidding on Australian-based projects for the US government 
CC Pines identified a growth opportunity to support the US Department of Defense in delivering its plans to invest $40 billion in infrastructure across the Indo-Pacific and began bidding on tenders. However, to win US defence contracts, businesses must provide bonds to submit a tender and secure the contract if their bid is successful.

Similar to FLOVAC’s contract requirements, these bonds could only be issued by providers accredited by the US government.

We supported CC Pines with surety bonds to secure two tenders from the US Navy for the construction of US Air Force Squadron Operations Facilities at RAAF Bases Darwin and Tindal in the Northern Territory. 

Where can you get a surety bond?

If your business needs a surety bond to secure a contract, we could help. 

Contact our team today to find out how we could support your business in expanding globally. 

Alternatively, explore more of our finance solutions here.