What is a surety bond?
A Surety Bond is a Guarantee of Fulfillment
Who’s Who?
The owner of a construction project wants to be guaranteed that a contractor and his subcontractors can do the job. A surety bond basically does just that; it ensures that the contractors will fulfill their side of the agreement. A surety bond is therefore a legally binding agreement between at least three parties:
- The ‘Obligee’ – the owner of the project; the recipient of an obligation by the Principal
- The ‘Principal’ – the primary party (contractor/subcontractor) who will be bound to the contract (obligation)
- The ‘Surety’ – the insurance company that guarantees the Obligee that the Principal is able to (and will) fulfill the contract
Why Bond?
Major construction and maintenance projects, both public and private, heavily depend on bonding to eliminate the risk of financial problems or fulfillment failure on the side of the contractor (Principal). This means that Federal Government organizations, State and Local Governments and Private Project Owners will simply not award contracts to companies who can’t be bonded. As a contractor, you’ll probably even need a bond to qualify as a bidder (‘Bid Bond’).
What Else?
There are other related bonds which include bonds for performance, payments (ensuring a contractor will pay his labor force and suppliers), and License and Permit Bonds (these guarantee the adherence to statutory provisions for public projects ensuring that a contractor obtains or renews certain licenses).
Finally, Maintenance Bonds are used to cover workmanship and material risks after the completion of a project. Although Maintenance Bonds can stretch for a number of years, one year is a typical period.