What is the difference between a guarantor and a surety?

Guarantors and surety are the two most common forms of financial protection used to ensure construction projects are completed. From a legal perspective, both guarantors and surety are similar, but in practice, they offer different benefits. Banks act as guarantor providing the money (a bank guarantee) to complete a construction project when the contractor cannot complete the job they’ve been contracted to do.

Insurance companies provide surety bonds, which also cover the cost of completing a project when a contractor is unable to finish it.

What is a guarantor?

Banks are commonly referred to as guarantors in the construction industry because they provide bank guarantees that pay debts owed by a construction company when they’re unable to complete a project. Guarantees are simple contracts supplied in writing.

How do I claim on a bank guarantee?

Companies can claim a bank guarantee when there is a breach of contract. The guarantor (the bank) will require proof of a contractual breach and details of the loss to claim the funds needed to finish the construction project.

Insurer surety bonds

Surety bonds are used in construction and engineering contracts as financial protection if the contractor fails to perform. A surety bond is a three-party contract involving the surety provider, the contractor and the client. The surety guarantees to pay for a loss caused when a contractor breaches a contract because they become insolvent. Insurers make payments without the requirement for a client to establish a breach of contract, and the contractor cannot challenge the client’s claim for breach of contract.

Insurance bonds are often a contractually required on many larger, high value construction projects where losses are potentially bigger.