A surety bond involves three parties: the principal (the person who has won the project contract), the obligee (person who is the owner of the project) and the surety (the surety bond Company who provides the surety). The principal assures that they will fulfill and complete the project requirement on time with accordance to the contract. The surety bonds specifically used in construction are called construction surety bonds.
There are three kinds of contract surety bonds:
1. Bid Bond
2. Performance Bond
3. Payment Bond
The bid bond is required to screen out unqualified bidders. If a bidder fails to sign the contract and provide the required performance and payment bond after winning the bid, the bid bond helps in providing financial security to the obligee.
The performance bond is signed to ensure that the contractor is bound to the terms and conditions of the contract and protects the owner from any kind of financial loss. If the principal is unable to perform according to the terms and conditions of the contract, the surety has to perform the contract or compensate up to the value of the bond to the obligee.
A payment bond is signed to ensure that the contractor will make all the payments to the workers, material suppliers, and sub-contractors involved in completion of the project and prevent the filing of licenses on the project.