What is a Surety Bond?
A bond is a three-way agreement between the Surety, the Principal
(who is the contractor or applicant) and the Obligee. Obligee
is a technical word for a beneficiary, who might be the project
owner, government agency, etc. The Surety is the party standing
behind the performance of the Principal. The Surety has evaluated
the Principal's ability and willingness to perform and is providing
their stamp of approval with a bond. If the Principal is unable
to satisfy the terms of their agreement, the Surety assumes
the responsibility and reimburses the Obligee.
Types of Surety Bonds
Subdivision Bonds
Subdivision bonds are different from the more common performance
bonds used for construction projects. With subdivision
bonds, the owner of the project provides bonds to the public
agency to guarantee the installation of improvements that will
ultimately be dedicated to the public but paid for by the owner/developer.
Bid Bonds
A bid bond is
provided to the Obligee/Owner from the contractor in order
to give assurance that if the contractor is the successful
bidder the contractor can provide a payment and/or performance
bond. If the contractor is the successful bidder and decides
not enter into a contract, therefore failing to provide a
payment and performance bond, then the owner can make
a claim on the bid bond for the
difference between the contractors bid and the lowest next
bid or the amount of the bid bond (5% to 20% of the bid amount)
whichever is less. In some cases the owner can claim the full
amount of the bid bond even if it’s more then the bid spread.
Performance Bonds
A performance bond
which promises that the terms of a contract, or some of them,
will be performed by the Principal/Contractor.
Payment Bonds
A payment bond promises
to pay some or all of the persons who provide material, labor,
or services for prosecution of a contract.
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