3 Different Types of Surety Bonds
Nowadays, a large number of firms looking to work with public or private owners understand the requirement of surety bonds. A surety bond should not be confused with insurance. A surety bond is simply a guarantee that the principal (business) will perform their obligations to the obligee (project owner or government agency). In case the principal does not succeed in performing the obligations, the surety comes into the picture. Surety (insurance company) provides the financial indemnification for claims by completing the project and paying the subs and suppliers.
There are basically 3 types of surety bonds:
Bid Bond: A Bid bond is an important type of surety bond which guarantees to the customer (obligee) the contractor (bidder) will enter into the contract and will replace the bid bond with a performance bond. In the event that they do not enter into the contract, the surety company will pay the difference between the contractor’s bid and the next highest bidder to the customer.
Payment Bond: A Payment bond is another written guarantee ensuring suppliers, employees, sub-contracts and other creditors will be paid for the work they perform under contract.
Performance Bond: A Performance bond is a written guarantee from the surety company that the contractor will complete the contract as per the terms and conditions of the contract. If the contractor fails to perform his duties, the surety company will complete or arrange completion to ensure the project is completed to protect the obligee from loss.
Serving numerous benefits to both the business and the customers, surety bonds are being used effectively in many industries to mitigate risk.