What is a Surety Bond?
A surety bond guarantees that a specific task will be fulfilled by bringing three parties together in a mutual, legally binding contract.
The three parties are:
The principal, which is the business or individual who is doing the work.
The obligee, which is the entity for whom the work is being done.
The surety, which is the insurance company that backs the bond with a line of credit in case the principal cannot fulfill the task.
Why Would I Need Surety Bonds, Then?
At this point, it seems like surety bonds only benefit the obligee since they’re the ones who are protected financially. You’re probably wondering how surety bonds can help you as a contractor. Fortunately, there are a few ways:
- Bonding increases your project opportunities. Your clients want to make sure that you’re both financially capable and experienced enough to undertake a project before hiring you. However, since it may be hard for them to do a thorough background check, using a surety bond to guarantee you’ll complete the project will help you gain job opportunities.
- Bonds grant you financial assistance. In the construction industry, unforeseen setbacks arise all the time. Extenuating circumstances may prevent you from completing a job. If that job was insured with a bond, the surety company can provide you with financial assistance. This is beneficial because with other forms of financial security, such as letters of credit and self-insurance, you do not have 100 percent payment protection. With bonds, you do.
Types of Surety Bonds
Introducing a surety bond into a contract can provide extra financial protection if an issue arises. Below are three types of surety bonds commonly used by contractors and project owners.
Contract bonds are typically used in the construction industry. They are used to assure project developers that contractors who bid for a job are financially capable of undertaking it. If the contractor is unable to complete the job, the project owner can make a claim on a contract bond to collect payment.
To guarantee satisfactory completion of a job, a performance bond may be introduced. This type of surety bond makes certain that a contractor will complete a contract according to the terms agreed upon. If the contract is not completed properly, the project developer can make a claim on the bond in order to access funds and pay a different contractor to do so.
Maintenance bonds are used to protect the owner of a project from faults in design, workmanship and materials that may arise after the project has been completed. A contractor bonded with this type of bond is obligated to fix any maintenance issues that arise. If the bonded contractor cannot resolve a maintenance issue, a claim can be made on the bond so the project developer can hire a different contractor to do so.