The components of a surety bond may seem pretty straightforward:
Someone promises to do something, someone else backs up that they will do it, and the third party gets a guarantee that it will be done. But that is a very simplified explanation. Let’s take a deeper look at who – and what – makes up these three-party contracts. In each bond, those involved include:
- The Surety is the party that guarantees performance
- The Principal the party that has the obligation
- The Obligee is the third party for whom the obligation is being guaranteed
There are many different scenarios where bonds may come into play to guarantee work or performance. In construction jobs, these are called “Contract Surety Bonds”, and there are four of them:
- Bid Bonds: Ensures the signing of an awarded contract and/or the providing of the required performance and payment bonds needed as a result of an awarded contract.
- Performance Bonds: Ensures the performance of a contracted job.
- Payment Bonds: Ensures the payment of suppliers and subcontractors for work done and materials provided.
- Warranty (or Maintenance) Bonds: Ensures that any issues related to workmanship and material defects found in the original construction will be repaired (while under warranty).
“Commercial Surety Bonds” are another set of bonds that are typically required as a result of Federal, state, and local governments. These bonds are required of individuals and businesses in certain scenarios related to their performance of a job or role. They include:
- License and Permit Bonds: These bonds relate to licenses and/or permits for various professions, including mortgage brokers, auto dealers, and others.
- Fiduciary (or Probate) Bonds: These bonds are required for individuals or parties that administer Trusts under court supervision.
- Court (or Judicial) Bonds: These bonds relate to plaintiffs or defendants in judicial proceedings and reserve the rights of the opposing litigant(s).
- Public Official Bonds: These bonds relate to public office holders, and ensure that they will perform their sworn duties.
- Miscellaneous Bonds: There are a wide variety of less common bonds that would not fit into the above categories. These include Fuel Tax Bonds, Warehouse Bonds, and many others.
If you are going to perform or bid on a job that requires a bond or bonds, it is best to discuss what you need with your agent. This will help you be better prepared to provide all the information needed and understand your obligations.