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What are surety bonds?

On Behalf of | Nov 21, 2022 | Construction Contracts

Risk is common when it comes to construction work, and businesses must protect themselves financially when working with contractors. While many contractors perform quality work and adhere to contract terms, some fall short in those areas.

That is where surety bonds come in. These bonds offer protection to multiple parties and provide legal recourse in case someone violates contract terms. Here is how surety bonds work and why they are so crucial.

How surety bonds work

Bonds help ensure that contractors honor the stipulations contained within their contracts when it comes to construction projects. Bonds involve three different entities, which are the principal, the obligee, and the surety.

The principal is the contractor, and the contractor is the person who must purchase a bond to ensure they can fulfill their financial obligations as they pertain to a construction job. The obligee is the entity that requires the contractor to purchase a bond. Finally, the surety is the company that provides the bond.

In the event the contractor does not fulfill their obligation, the surety steps in to ensure that everyone receives the money owed. In this case, the contractor would need to reimburse the surety company for the money paid out. If the contractor is unable to do so, the surety company can pursue legal action against them.

Types of construction bonds

Bid bonds protect project managers by ensuring the contractor bidding has the resources necessary to complete a job. Performance bonds offer assurance that the contractor will be able to live up to the expectations laid out in their contract. And as the name implies, payment bonds specifically guarantee payment to anyone who supplies materials or works as a subcontractor on a job.

The right financial protection is crucial when it comes to construction projects. Fortunately, surety bonds offer a reliable guarantee in case a contractor fails to meet expectations.