Education - Bonds 101
Surety bond - What is it?
A surety bond guarantees the performance of a contract or an obligation. Although surety bonds are generally written by insurance companies, surety bonds more closely resemble loan guarantees than insurance policies.
Primary bond categories
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Contract surety bonds - These bonds provide financial security and construction assurance on building and construction projects by assuring (surety) the project owner (obligee) that the contractor (principal) will perform the work and pay subcontractors, laborers, and material suppliers according to the contract documents. Examples are bid, performance and payment bonds.
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Commercial surety bonds - These bonds guarantee performance by the principal of an obligation or undertaking as described in the bond. Examples are license bonds, judicial bonds and court bonds.
Basic types of Contract surety bonds
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Bid Bond - The bid bond assures that the bid has been submitted in good faith and that the contractor will enter into the contract according to the terms of the bid.
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Performance Bond - The performance bond protects the Obligee from financial loss should the Principal fail to perform the contract according to its terms and conditions.
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Payment Bond - The payment bond assures that the Principal will pay specified subcontractors, laborers and material suppliers on the project.
Basic types of Commercial surety bonds
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License and Permit Bond - Guarantee that an individual or business will operate their business in accordance with the legal requirements of the permit or license granted to them.
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Judicial Bond - A judicial bond guarantees that the Principal will comply with the instructions of the court and/or legal requirements of their position.
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Public Official Bond - Guarantee that a public official will property serve in their capacity.
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Miscellaneous Bond - Include a variety of bonds not classified elsewhere. The most common Miscellaneous Bonds required by construction companies are those to guarantee wage and welfare benefits in compliance with union contracts.
Why are Contract surety bonds needed?
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Contract surety bonds are a risk transfer mechanism. These bonds transfer the Obligee's contractual risk to the Surety and assure specified subcontractors, laborers and material suppliers of payment.
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Contract surety bonds protect taxpayers' dollars by assuring the Obligees that the contracts will be completed according to the issued contracts - on time, on budget and according to the specifications.
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Contract surety bonds protect specified subcontractors, laborers and materials suppliers that they will be paid.