What is a Surety Bond?

A surety bond ensures contract completion in the event of contractor default. A project owner (called an obligee) seeks a contractor (called a principal) to fulfill a contract. The contractor obtains a surety bond from a surety company. If the contractor defaults, the surety company is obligated to find another contractor to complete the contract or compensate the project owner for the financial loss incurred.

There are four types of surety bonds:

Bid Bond: Ensures the bidder on a contract will enter into the contract and furnish the required payment and performance bonds if awarded the contract.

Payment Bond: Ensures suppliers and subcontractors are paid for work performed under the contract.

Performance Bond: Ensures the contract will be completed in accordance with the terms and conditions of the contract.

Ancillary Bond: Ensures requirements integral to the contract, but not directly performance related, are performed.

When do I need a surety bond?

Any Federal construction contract valued at $150,000 or more requires a surety bond when bidding or as a condition of contract award. Most state and municipal governments as well as private entities have similar requirements. Many service contracts, and occasionally supply contracts, also require surety bonds.

Surety Bonding Overview:

Many different service companies may need a bond to receive work from another company or a consumer for protection in case the business doing the work does not perform. Many licensed contractors or businesses that need licensing are required to have some type of surety bond to show that they can protect a consumer in case of negligence or if a company goes out of business.

Many times even when a company has general insurance they are still required to have some type of bonding in place. It also gives consumers a piece of mind when they are hiring your business to perform services.

Some resources for this article where obtained from the SBA.gov information site.