A surety bond is the best way to ensure a contract will be completed per the agreed upon terms. There are three main parties involved in a bonded contract, the obligee (client), the principal (an individual or business) and the surety (insurance company). An obligee is the person who required the bond, principal is the individual or company that needs to purchase the bond and the surety is the insurance company that backs the bond.
Why do companies purchase surety bonds?
Surety bonding is required by companies which need permit bonds before they get their business licenses. Moreover, construction professionals are often required to obtain contract bonds before they can work on various projects. To make it simpler, a surety bond is required to protect the obligee against any losses incurred due to the principal’s failure to meet the obligation. However, it is mandatory for any federally-financed construction project valued at more than $150,000 to purchase surety bonds. Similar requirements exist for various state projects as well.
Companies with adequate working capital and cash flow to complete a project and good past performance history are candidates and should apply for a surety bond facility.