Are letters of credit a suitable substitute for surety bonds?
The short answer is no. Surety bonds offer the best way to guarantee a contractor’s performance. With a letter of credit, the bank simply pays over a sum of money to the project owner if there is a default. The amount is usually less than what is needed to finish the project and the bank assumes no role in arranging for the work to be completed. The surety bond company has duties and responsibilities to both the contractor and the project owner based on the underlying contract. The bonder strives to be equitable to all parties to successfully ensure the completion of projects. A letter of credit is just about money. A surety bond is about finishing the job.
