Surety Bonds Explained

  • 2 min read

A surety bond is a three-party agreement between you, the surety company, and the other party. The surety company agrees to pay the other party up to the amount of the bond if you fail to live up to your contractual obligations.

Who are the parties in a surety bond?

There are three parties involved in a surety bond. The first party is the obligee who is the employer or government agency requesting the surety bond. The second party is the principal who is the person applying for the surety bond. The third party is the surety which is the surety company.

The principal will submit an application to become bonded and the surety will review their application and determine if they meet the criteria to be bonded. If they do, then they will issue them a bond that states that if they break any laws or violate any of their obligations as a principal then they will pay back all damages caused by them.

Where are surety bonds used?

The most common type of surety bond is a performance and payment bond, which guarantees that the contractor will perform their duties and also pay any subcontractors or material suppliers who are owed money. These bonds are typically required on large projects and are secured by a cash deposit held by the surety company.

Surety bonds are also frequently used as a requirement for state and federal government projects. Typically a surety bond would be required for a large project. If you are working with the state or federal government, make sure you understand what types of bonds are required for your project and make sure you have them secured before starting work.

Surety bonds will help provide peace of mind for both your company and your client. They are not designed to guarantee a project’s performance, however. Rather, they safeguard the client against non-performance, which is often caused by circumstances beyond the control of either party. They provide protection for clients by ensuring that any and all labor, equipment, or materials required to complete a contracted project will be provided by a third party. If you want peace of mind when dealing with a federal project or large-scale project, look into getting a surety bond.

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