How do Bonds Work?

Working with a Bond

performance bond application

We are often asked how do bonds work. In many ways, a bond is a very simply idea. It is essentially a guarantee. However, instead of just being a guarantee by the person or company itself, a bond involves a third party to act as the guarantor.

A bond is a three party agreement between the Surety, the Obligor and the Obligee. The surety is the third party that is providing the guarantee. The Obligor is the person being guaranteed by the surety and the Obligee is the person that is receiving assurance under the surety bond. Let’s look at an example:

Let’s assume that you have purchased a piece of property and decided to build an apartment complex. It’s rather expensive and you cannot afford any delays on the project and certainly cannot afford to have your contractor default. So, you go out and get several bids from general contractors to build your apartment complex. As a part of this process, you state that you require a performance bond for the project. So, each general contractor provides this performance and payment bond. The bond is written by AIG. In this case, AIG is the surety, you are the Obligee and the general contractor is the Obligor.

In federal government jobs, a performance bond is required by the Miller Act. The government is the Obligee in those situations.