Surety bonds for contractors
A surety bond is a guarantee issued by a general insurance company on behalf of a contractor. IRDAI allowed insurers to issue them from 2022, the Finance Ministry treats them as equivalent to bank guarantees for central government procurement, and NHAI, Railways (RVNL) and other agencies accept them. Unlike a bank guarantee, a surety bond needs no margin money and does not use up your bank’s non-fund limits.
Types of surety bond
| Bond | Used for |
|---|---|
| Bid bond | Instead of earnest money deposit (EMD) or bid security when tendering |
| Performance bond | Performance security after the contract is awarded |
| Advance payment bond | Against mobilisation or other advances from the employer |
| Retention money bond | To release retention money held back from running bills |
Surety bond vs bank guarantee
| Bank guarantee | Surety bond | |
|---|---|---|
| Margin money | Usually 10%–25% or more, often kept in an FD | None |
| Bank limit | Uses your non-fund limit | Not used |
| Cost | Commission about 1%–2% a year plus cost of margin | Premium about 0.5%–3% a year by risk |
| Payment on claim | On demand | After the claim is checked, as per bond wording |
| Issued by | Bank | IRDAI-licensed general insurer |
Insurers issuing surety bonds include New India Assurance, SBI General, ICICI Lombard, HDFC ERGO, Tata AIG, Bajaj General, Universal Sompo, IFFCO Tokio and Liberty General.
Who is eligible
- Contractors with a track record of similar projects, typically 3 years or more
- Audited financials with positive net worth and profit
- Clean credit record for the business and promoters
- A contract with an employer that accepts insurance surety bonds – check the tender document
- An indemnity agreement by the contractor and usually the promoters; some profiles may be asked for collateral
How much you can get
- The bond amount is set by the tender – bid security, performance security or the advance amount
- Tenure up to about 5 years including the defect liability period, depending on the insurer
- Premium depends on bond type, contractor experience, credit standing and project risk
Documents
- Audited financials for 3 years and latest provisional figures
- Work orders and completion certificates of past projects
- Current order book
- Tender document or letter of award
- KYC of the firm and promoters
Tips from our credit panel
- Use surety bonds to free bank guarantee limits and margin money for working capital
- Read whether the bond is conditional or unconditional before submitting it to the employer
- Collect quotes from two or three insurers – pricing varies widely in this young market
Common questions
Is a surety bond accepted instead of a bank guarantee?
Yes for central government procurement, NHAI, RVNL and many other agencies, but acceptance depends on the tender conditions, so check before applying.
Do I need to give margin money for a surety bond?
No. Insurers do not ask for margin money; the contractor signs an indemnity to repay the insurer if a claim is paid.
How much does a surety bond cost?
Roughly 0.5% to 3% of the bond amount a year depending on risk; large, well-rated contractors have obtained lower rates.