WHAT IS A SURETY BOND?

Surety bonds are usually required of general contractors on public projects let by federal, state or local government agencies. But many subcontractors also find that they are being asked to provide bonds. And an increasing number of private project owners are requiring bonds as well. Simply stated, a surety bond is an agreement under which one party, the surety, guarantees to another, the owner or obligee, that a third party, the contractor or principal, will perform a contract in accordance with contract documents. In the case of a subcontract, the general contractor is the obligee, and the subcontractor is the principal.

There are three types of contract surety bonds. The first, the bid bond, provides financial assurance that the bid has been submitted in good faith and that the contractor intends to enter into the contract at the price bid and provide the required performance and payment bonds. The second, the performance bond, protects the obligee from financial loss should the contractor fail to perform the contract in accordance with the terms and conditions of the contract documents. The third kind of contract bond is the payment bond which guarantees that the contractor will pay certain subcontractor, labor and material bills associated with the project.