What are Surety Bonds?
Contract surety bonds provide assurance to the project owner that a contractor is capable of completing a project according to contract specifications. Suretyship is a loss-avoidance mechanism to prequalify contracting firms based on their credit strength, experience, and capability to successfully complete contracts. The economic risk of contractor default stays with the bonded contractor, who must sign an indemnity agreement holding the surety harmless. When it issues a surety bond, the surety company has prequalified the contractor and offers assurance to a project owner that the contractor is capable of performing the contract according to its terms and conditions. Furthermore, the surety company guarantees that the contractor will pay certain laborers, subcontractors, and suppliers associated with the project. How Does a Surety Bond Work? Contract surety bonds are three-party agreements whereby one party (the surety company) guarantees another party (the owner) that a third party
A surety bond is a specific type of bond which involves three different parties. The first party is the principal — this is the person or organization who is being secured against default. The second party is the obligee — this is the person or organization who is owed money or labor. The third party is the surety — this is the person or organization who is promising to pay a certain amount should the principal default. Surety bonds may be used in an incredibly wide range of circumstances. They are basically used any time an individual or group is expected to do something, and some further assurance of their compliance is needed. The principal enters into a contract with a surety, usually an insurance organization or underwriter, basically promising that they will reimburse the surety if they default on their obligation to the obligee. If they do default, the surety gives the agreed upon amount of money to the obligee. The principal is then legally required to reimburse the surety,
This is done for the benefit of the obligee. The contract is settled so as to induce the obligee to contract with the principal, i.e., to demonstrate the credibility of the principal. Surety Bonds are bonds required by Private Industry, Municipalities, States and the Federal Government for making sure on the subject of the principal abides by the governing rules as well as policies. Types of bonds There are two main categories of bond types: • contract bonds • commercial (non-contract) bonds Contract bonds guarantee a specific contract. Examples include supply, performance, bid, maintenance and subdivision bonds. Commercial bonds guarantee per the terms of the bond form. Examples include license & permit, union bonds, etc. Suretyship bonds origins and present Suretyship bonds originated hundreds of years ago as a mechanism through which trade over long distance could be promoted. They are frequently used in the construction industry: in order to obtain a contract to build the project,
