The surety bond guarantees the obligee that the principal will conduct themselves per the terms outlined in the surety bond.

Surety bonds are legally binding contracts that ensure obligations will be met among three parties:

A) The principal: Whoever needs the bond.

B) The obligee: The one requiring the bond.

C) The surety: The insurance company that guarantees the principal can fulfill the obligation.

A) Guarantee that the bonded project will be completed according to the terms of the contract and at the determined contract price.

B) Guarantee that the laborers, suppliers, and subcontractors will be paid even if the contractor defaults, which can result in lower prices and expedited deliveries.

C) Smooth the transition from construction to permanent financing by eliminating liens.

D) Reduce the possibility of a contractor diverting funds from the project.

E) Provide an intermediary – the surety – to whom the owner can air complaints and grievances.

F) Lower the cost of construction in some cases by facilitating the use of competitive bids.

The two main categories of surety bonds are:

1. Contract Bonds: Contract bonds guarantee a specific contract. Examples include performance bonds, bid bonds, supply bonds, maintenance bonds, and subdivision bonds.
2. Commercial Bonds: Commercial Bonds guarantee per the terms of the bond form.

Surety bonds are typically required for contractors who seek to work on government contracts. They are also required for persons and companies licensed by a governmental entity. Even when not compulsory, surety bonds make sense when a contract involves performance because they help compensate obligees when principals fail to meet their contractual obligations. However, they do not make sense if the number of possible damages is negligible.

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