There are many different ways that parties can reach and form an agreement that will be substantiated. One of these ways is with a surety bond. According to the SBA.gov (U.S. Small Business Administration), there are four primary types of surety bonds: a bid bond, payment bond, performance bond, and ancillary bond. A bid bond ensures that the bidder on a contract will enter into the contract and make the required payments and performance bond if they win the contract; A payment bond ensures that everyone is paid for their work covered in the contract; A performance bond ensures that the terms and conditions of the contract are upheld; And an ancillary bond ensures requirements integral to the contract are performed. Here is more on the specifics of what surety bonds are and how they can help.
What is a Surety Bond?
A surety bond is simply a contractual agreement involving three parties: the principal, the obligee, and the surety.
- The principal is the individual or business that purchases the bond for a guarantee.
- The obligee is the person or entity that requires the bond (this is often a government agency).
- The surety is the insurance that backs the bond and provides financial guarantee to the obligee on behalf of the principal.
It is basically a risk transfer mechanism, and according to SuretyBonds.org, a surety bond guarantees that a principal understands and follows the regulations outlined in the license and permit, construction, commercial, and/or court contract. Someone who is bonded must fulfill their portion of the obligations specified in the particular, detailed contract. If the principal fails to do so, the surety has guaranteed that they will complete the work in terms of the contract whether it is through a payout or through other actions. A surety who refuses to do so puts themselves and the principal in danger of being charged with fraud or misrepresentation.
How Can It Help?
There are many benefits of a surety bond that can help those who are involved with the contract. If there is a third party (the surety), a contractor can be considered pre-qualified because they have the backing of the surety to verify that the contractor is capable, qualified, and financially stable. According to Simplebond Insurance Services, LLC, “Having a surety will also make the principal or contractor less likely to default on a project in fears of upsetting or escalating the problem to the surety. Furthermore, a surety may decide to freely offer technical, managerial, or financial assistance to the principal, which benefits not only the principal, but the obligee because it helps to push the project forward, reducing the chances of default more and more.”
The owner of the project and contract also has assurance because they know that the contract will he upheld and the project completed, or else they will be reimbursed. Additionally, subcontractors and suppliers might present lower rates in their quotes for materials and extra work because they know there is protection of their payments under the bond. Not only are they protected against financial loss, but a surety bond relieves the stress of substantial risk-taking.
This is only a simplified version of surety bonds. They can actually be quite complex with extra benefits added depending on what the bond is being used for. It is important to understand the specifics of a contract if you do become a part of a surety bond.
