Why do you need a Surety Bond?
A surety bond is a three-party guarantee between the surety, the obligee (usually the project owner), and the contractor. The surety guarantees to the owner that the contractor will perform a contract in accordance with contract documents. Although surety bonding is considered a line of insurance, it has many characteristics of bank credit. The qualification process for the contractor is more like obtaining bank credit than purchasing insurance.
Federal, State, Local Governments and most school districts require contract surety bonds. These bonds are designed to protect the tax payers on publicly funded projects. Some private owners and bank funding sources also require contract bonds to protect their financial interests and potential liens that occur in disputes and failures on private projects.
A Bid Bond provides financial assurance to the owner. This type of bond states that the contractor possesses sufficient financial credentials to accept the job and will enter into a contract with the owner for the contractor’s bid. The contractor also commits to providing a performance and payment bond when awarded the project.
A Performance Bond ensures the contractor will perform its contractual duties in accordance with the contract. If the contractor fails to complete the project according to the contract, the owner can make a claim. Frequently, performance bonds work in conjunction with payment bonds.
A Payment Bond, also known as a Labor and Material Bond, guarantees that the contractor will pay all financial obligations (material, labor, subcontract, etc.) relating to the contract. If the contractor fails to pay subcontractors and suppliers for their work, the payment bond amount may be used as reimbursement to these parties.
A Commercial Bond guarantees the contract will comply with local statutes and ordinances. This type of bond is also known as a license or permit bond. Depending on the project, Commercial Bonds may also oversee adherence to state and federal regulations. The major categories of Commercial Bonds include: