Surety Bonds

1. The principal: whoever needs the bond
2. The obligee: the one requiring the bond
3. The surety: the insurance company guaranteeing the principal can fulfill the obligation

• Guarantee that the bonded project will be completed according to the terms of the contract and at the determined contract price;
• Guarantee that the laborers, suppliers, and subcontractors will be paid even if the contractor defaults, which can result in lower costs and expedited deliveries;
• Smooth the transition from construction to permanent financing by eliminating liens;
• Reduce the possibility of a contractor diverting funds from the project;
• Provide an intermediary – the surety – to whom the owner can air complaints and grievances;
• Lower the cost of construction in some cases by facilitating the use of competitive bids.

There are two main categories of surety bonds:

• Contract Bonds
• Commercial Bonds

Contract bonds guarantee a specific contract. Examples include Performance Bonds, Bid Bonds, Supply bonds, Maintenance Bonds, and Subdivision Bonds. Commercial Bonds guarantee per the terms of the bond form.