What Are Surety Bonds And How Do They Work?
Risk is a fact of life in the business world. Business contracts are made and broken everyday. When businesses fail or default, the surety bond offers a level of protection to the parties involved, usually project directors and those paying for the project. The surety bonds are often required for contractors who desire to sell their services to businesses. They keep the risk associated with contractor failure at a minimum.
A surety bond is an agreement by at least three parties, the recipient, principal, and surety party. The recipient is receiving the contracted service. The principal is the one contracted to perform the service. The surety party assures the recipient that the contractor will complete the service, or services, agreed upon.
Contract bonds and commercial bonds are two categories of surety bonds. Bid bonds, performance bonds, and payment bonds are three types of contract bonds. A bid bond is a guaranty that a contractor will agree to take a project at the lowest bid. If the contractor doesn’t start the job, the recipient can recoup the difference between the lowest and the second lowest bid. A performance bond protects the recipient from contractor default or failure. A payment bond guarantees the contractor will pay for materials, subcontractors, and labor. The different forms of commercial bonds are too numerous to list here. Some examples include mortgage broker bonds, auto dealer bonds, and contractor license bonds.
Due to the nature of bond underwriting, it’s difficult to establish a common cost for surety bonds.