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A contract surety bond is a way for one party to hold another to the terms of a contract.
A contract surety bond works with three main participants. The principal is the party who purchases the contract surety. The surety is the bond itself, which costs a certain amount. The obligee is the party with whom the principal enters a contract. In the case that the principal defaults on the contract, the obligee can make a claim on the bond, and it will pay out to the obligee.
Usually, contract surety bonds are used for construction firms. Contracts involved in contract surety bonds are likely to include the specifications of the project for which the construction company has been hired. In the case that the project is not completed, or not completed as stated in the agreement, the obligee can make a claim on the surety.
Several kinds of contract surety bonds exist, depending on the kind of contract involved. The main kinds of contract surety bonds are bid bonds, performance bonds, and payment bonds. A bid bond is used when a company is bidding on a project, a performance bond is used to ensure the project is completed according to certain terms, and a payment bond ensures that all parties are paid as they should be by the principal.
Who Needs a Contract Surety Bond? Why?
Construction firms need to have contract surety bonds when required by a contract. The bond is a way to make sure that the construction company follows the terms of a contract.
A contract may be required by a party who wants to prevent contractor default. It protects the project owner from a potentially huge financial loss in the case that a contractor fails to follow the terms of the contract without having to go through such a huge legal process. It can also protect the project owner from liability if a contractor fails to pay subcontractors, material suppliers, laborers, and other people hired to work on the project.
A surety company puts a lot of effort into determining whether or not to back a contractor because paying a surety to an obligee has the potential to be very expensive. The reason that a project owner requires a surety is that these companies have decades of experience performing background checks and researching contractors.
Do You Need a Contract Surety Bond?
If your construction company is interested in bidding on a project, or if you’ve been awarded one, you may need a contract surety bond. We’re here to help you find the right one! Contact Fusco-Orsini today.