What is a Surety bond?
Surety bonds are agreements in which the issuer of the bond (the “surety”) joins with another party (the “principal”) in guaranteeing work or payment to a third party (the “obligee”).
Obligee: The party (person, corporation, or government agency) to whom a bond is given. The obligee is the party protected by the bond. In construction, this is typically the owner or the general contractor.
Principal: The individual (that’s YOU) who is required to be bonded by the obligee.
Surety: A bond company that guarantees the acts of another person.
Bid Bonds – A bid bond guarantees that the bonding company (“surety”) will provide a performance and payment bond on behalf of the principal once the principal is awarded the contract. A claim can be filed against the surety if they refuse to write the performance bond.
Performance Bond – A performance bond is used once the contract is awarded. A performance bond protects the owner from financial loss in the event that the contractor fails to perform the contract in accordance with its terms and conditions. Most performance bonds include a provision that covers workmanship of the project for one year after completion. A performance bond is typically included with a payment bond.
Payment Bond – A payment bond, sometimes called a labor and material bond, protects certain specified tiers of laborers, subcontractors, and material suppliers against nonpayment by the contractor. Generally, these claimants may seek recovery directly from the surety company under the payment bond.