What is a Surety Bond?

A surety bond is a way to make sure that a contract is completed in the event of contractor default and is a way for contractors and project owners to protect themselves.  

When a project owner, known as an obligee, seeks out a contractor, known as a principal, to fulfill a contract, it is up to the contractor to purchase a surety bond. A contractor can purchase a surety bond from a surety company. A surety bond obligates the surety company to find a different contractor to complete a project if the contractor defaults on their contract with the project owner or obligee. A surety company may also be obligated to compensate the project owner or obligee for any financial loss incurred.  

There are four primary types of surety bonds. The first is the bid bond. A bid bond helps protect a company when they bid on a project. It works to ensure that when a company is selected as a winning bid by a project owner, that the project owner fulfills their obligation to the contractor by awarding them the bid. It ensures that the contractor will be paid the required payments and performance rewards that were outlined in the winning bid.  

The second type of surety bond is a payment bond. This bond covers suppliers and subcontractors who work for the main contractor. A payment bond makes sure that supplies and subcontractors are paid for any and all work they perform while under the contract.  

The third type of surety bond is a performance bond. This is an important bond for an event owner to make sure is included in their contract with their contractor. A performance bond guarantees that the contract will be completed following the agreed upon terms and conditions of the said contract.  

The last type of surety bond is an ancillary bond. This type of surety bond makes sure that everything within the contract is followed. An ancillary bond comes into effect if requirements that are integral to the contract but are not directly related to performance are not performed. 

Whether you are a project owner or a contractor, it is important to cover your assets by purchasing the correct surety bond for your upcoming contract.