Did you know that surety bonds have existed for quite a while now? Some people may not think of surety bonds as an important part of business, but the fact of the matter is, they are. They aren’t just an unnecessary expense which eats into your profit. These bonds are considered a selling tool by certain firms as there are certain projects which can only be bid on by firms which have surety bonds in place. Any construction firm which seeks large private or public projects will surely understand the importance of surety bonds. In this article, I am going to explain what exactly suretyship is and the various types of bonds available today.
What exactly is a surety bond? In short, it is basically a type of credit which is wrapped up in a guarantee. Do not mistake it for insurance though. Its main purpose is to make sure that a principal performs all its duties as per its contract with the obligee.
And in situations where the principal does not perform according to the contract, the surety will take over their responsibilities and also provide the finances required to complete the project as promised. Every surety bond will have three parties:-
- Principal– This is the party which agrees to undertake certain obligations as per the bond.
- Obligee– This is the person who will be receiving all the benefits associated with the surety bond.
- Surety– This is the party which issues the bond and guarantees the obligations which are covered under it.
Now, let’s look at the various types of bond available today:
1. Bid bonds– This type of bond is a form of assurance for the obligee that a contractor submits his bid with good faith, with an intent to fulfill the contract at mentioned price. It also is a guarantee that the principal is going to be able to get the necessary performance bonds. This bond is aimed at providing assurance to the owner of a project in case a principal is given a project and then refuses to proceed. In such situations a project owner will have no option but to go with the next best bid. But the defaulting contractor will have to forfeit his entire bid bonds amount. This money is meant to cover the difference in costs for the project owner.
2. Performance bonds– These bonds provide financial protection to a project owner in an event where the principal fails to properly perform all their obligations as per the terms and conditions of a contract.
3. Payment bonds– This type of bond ensures that all delays are avoided by providing a surety to the owner that all sub-contractors & suppliers will be paid through the bond if the principal defaults in payments to these third parties in any way.
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