We all are aware of the definition of Surety Bonds. These are a kind of insurance required by the government or other authorities to allow the principal to carry out certain business activities. Surety bonds are bought and backed by the Principal. There are many alternatives available in the market that can be used in the lieu of the Surety Bonds. All these alternatives have some types of disadvantages associated with them.

Some of the reasons why surety bonds are better than its alternatives are mentioned below

Collateral security: surety bonds do not require any collateral security. Thus, your assets can be solely used for the operating and developing the business. The other options require 100% collateral to provide the guarantee.

Costs: The Surety bonds are issued for a reasonable premium. The cost of surety bond depends upon a number of factors such as the reputation and financial credentials of the applicant. Other alternatives can be expensive in comparison with the Surety Bonds.

False claims: in other methods such as irrevocable letter of credit false claims can be made. Surety Bonds do not involve these risks. Surety companies conduct a detailed scrutiny before allocating bonds to the different applicants.

Aggrandized defaults: other methods require the assets of the business as a collateral security. It leads to decreased efficiency due to low working capital. This may lead to frauds and bankruptcy.

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The surety company and insurance company are often confused with each other. Typically a surety company is part of an insurance company but it is not an insurance policy. For the projects that are Public funded, Surety bonds ensure prequalification of the contractors, completion of the project and protection of the taxpaying citizens.

A Surety bond can be described as a three-party contract. The three parties can be described as below

The Principal (Contractor in this case): The principal promises to fulfill all the promises mentioned in the contract.

The Obligee: It a party who is the recipient of the obligation by the principal.

The Surety: The party who is liable to reimburse all the losses in case principal fails to fulfill his obligations.

Contract Surety bonds are the bonds that used in the construction.

The Contract Surety bonds can be broadly categorized into three types:

Bid Bond: This bond ensures that process of competitive bidding is carried out without any discrepancy. If the bidder has acquired this bond and fails to take up or complete a project then the associated loss will be reimbursed by the Surety Company. In this way, it provides financial security to the Obligee.

Performance Bond: This bond ensures that the contractors deliver their performance as per the terms and conditions of the contract. In the case of any default, the contract can be terminated by the Obligee and the performance Bond Company will be liable to get the project completed or reimburse the loss arising out of an incomplete project.

Payment Bond: there are many people, who are associated with the contract such as sub-contractors, workers, suppliers. This bond ensures their financial security by presenting a promise that they will be paid by the contractors on time.

Surety Bonds are a necessity in the field of public construction. Construction is a risky business and before being bonded on a particular construction project, contractors must undergo a financial and operational review. A judgment is made on whether the contractor is capable of carrying out the obligation as it becomes the responsibility of the Surety Company to complete the project or have it completed in the case of failure by the Principal.

There are different types of construction bonds required for contractors. For the purpose of sub-contracting, private entities and general contractors also need construction bonds from a Surety Company.

Bid Bonds: Guarantees the bids of contractors on bonded jobs.
Performance Bond: Ensures the performance of the Principal through the successful completion of a project.
Payment Bonds: Guarantees all sub-contractors, workers, and laborers involved in the construction project will be paid.
Supply Bonds: Suppliers are required to deliver material as stated in the bond.
Maintenance Bond: Are a warranty for the work after its completion.