Surety bonds are commonly required to manage the risk associated with construction projects. They are an agreement which ensures a contract will be completed should the contractor be unable to do so. There are mainly three types of contract surety bonds, which are:
Bid bond: Also known as a bid guaranty or bid surety, the bid bond is an assurance from a third party (an insurance company or bank) in written form to the client by the contractor (bidder) with a bid. This bond guarantees the contractor will enter into the project for the price quoted in the bid. This builds trust in the bidding company where they will become more likely to have their bids accepted in the future.
Performance bond: A performance bond assures a client the contractor is capable of performing the project. It protects the client from loss by providing legal and financial protection.
Payment bond: A payment bond is another important type of surety bond which guarantees the contractor will pay the sub-contractors, suppliers, and laborers who are working on the project.
Surety bonds are generally approved by the surety only when they are confident the contractor is qualified to perform the contract and is financially sound to withstand the assorted risks involved in the completion of the given construction project.