A surety bond ensures contract completion in the event of contractor default. A project owner (called an obligee) seeks a contractor (called a principal) to fulfill a contract. The contractor obtains a surety bond from a surety company. If the contractor defaults, the surety company is obligated to find another contractor to complete the contract or compensate the project owner for the financial loss incurred.
There are four types of surety bonds:
- Bid Bond: Ensures the bidder on a contract will enter into the contract and furnish the required payment and performance bonds if awarded the contract.
- Payment Bond: Ensures suppliers and subcontractors are paid for work performed under the contract.
- Performance Bond: Ensures the contract will be completed in accordance with the terms and conditions of the contract.
- Ancillary Bond: Ensures requirements integral to the contract, but not directly performance related, are performed.
When Will I Need A Surety Bond?
If you want to bid on public construction contracts and many private contracts, you?ll probably need a surety bond. For example, surety bonds are mandatory for any federally-financed construction project valued over $150,000 and are mandatory on many state projects as well. Commercial contracts for manufacturing and service or supply work may also require a surety bond.
Who is Protected by a Contractor Bond?
Construction professionals sometimes misunderstand the purpose of contractor license bonds by assuming the coverage protects themselves. However, surety bond insurance differs from a traditional insurance policy in the fact that this type of surety bond actually protects the general public by guaranteeing that construction professionals will adhere to whatever stipulations are found within the bond's legal language. By purchasing contractor license bonds, construction professionals agree to work according to certain regulations, thus protecting government agencies and consumers from potential financial loss.
What is A Surety Bond?
To put it simply, they guarantee that specific tasks are fulfilled. This is achieved by bringing three parties together in a mutual, legally binding contract. The principal is the individual or business that purchases the bond to guarantee future work performance. The obligee is the entity that requires the bond. Obligees are typically government agencies working to regulate industries and reduce the likelihood of financial loss. The surety is the insurance company that backs the bond. The surety provides a line of credit in case the principal fails to fulfill the task. The obligee can make a claim to recover losses if the principal does fail to fulfill the task. If the claim is valid, the insurance company will pay reparation that cannot exceed the bond amount. The underwriters will then expect the principal to reimburse them for any claims paid.