What is the difference between a guarantee bond and a surety bond?

Surety bonds and bank guarantees ensure a contractor’s performance and financial commitments on a construction project. They are similar, but there are some significant differences:

  • Insurer companies issue surety bonds and bank guarantees are issued by banks
  • Surety bonds guarantee the completion of a construction project
  • Bank guarantees fulfil financial commitments, such as repaying loans
  • Surety bonds can cover a single or multiple transactions, bank guarantees cover multiple obligations
  • Surety bonds are secured on the creditworthiness of the applicant company, bank guarantees often require security

Why are bonds so popular now?

Bonds are more widely used when economic conditions are challenging because they offer all parties greater financial security in a business deal. A bond reassures clients they’ve employed a contractor who can complete their contracted work. Bonds are typically viewed favourably during the tender process because they demonstrate the financial credibility of the contractor and guarantee the work will be done.

What type of construction project are covered by bonds?

There’s a range of bonds to cover most projects. Advance payment and performance surety bonds protect the client against damage (losses) if the contractor fails to fulfil its contractual obligations because of bankruptcy. The client will receive the amount covered by a surety and can use this money to have the work completed by another contractor.

Managing and facilitating bonds | Kerry London Limited