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, also known as a material and labor bond, protects certain specified tiers of subcontractors, material suppliers, and laborers against the contractor not paying. In general, these claimants have a tendency to look to get paid directly by the surety company pursuant to the terms of the payment bond.