Surety Bonds

A surety bond is a form of insurance that guarantees contract completion. An obligee (or business) seeks a principal (or contractor) to fulfill a contract. To insure the obligee a successful delivery, the principal buys a surety bond so the surety company becomes responsible for its obligations. If the principal defaults, the surety company can either find another principal to fulfill the contract or compensate the obligee’s financial losses. In other words, the surety assures a successful contract because it assumes all financial obligations if the principal does not deliver.

There are three types of surety bonds:

Bid Bond: Guarantees that the bidder on a contract will enter into the contract and furnish the required payment and performance bonds if awarded the contract.

Payment Bond: Guarantees that suppliers and subcontractors will be paid for work performed under the contract.

Performance Bond: Guarantees that the contractor will perform the contract in accordance with its terms and conditions

Any Federal Construction contract valued at $100,000 or more requires a surety bond as a condition of contract award. Most State and municipal governments have similar requirements, as well as private entities. Many service contracts, and occasionally, supply contracts, also require surety bonds.

Any business, large or small, must apply for a bond with a Surety Company or an agent that is authorized to represent the Surety Company. The business is then evaluated as part of an underwriting process that assesses such business attributes as character, capability and capacity. The purpose of underwriting is to gauge the likelihood that the contractor will successfully perform the contract.