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Understanding how surety bonds work

When the decision is made to embark on any sort of construction project, it can prove to be an exciting and altogether nerve wracking time given the gravity of the stakes. Indeed, it's important for the project owners to have peace of mind knowing that the people they are working with are going to not only complete the work, but comply with all of the terms of the contract.

In today's post, we'll examine a mechanism designed to provide project owners with just this sort of peace of mind: surety bonds.

Surety bonds: Background

In general, a surety bond helps ensure that a planned development is completed according to the terms of the contract between the contractor and project owner.

Specifically, the project owner -- often referred to as the obligee -- seeks to secure the services of a contractor -- often referred to as the principal -- to complete a particular contract.

Once the contractor is selected, they will be required to secure a surety bond from an insurance company, the terms of which essentially dictate that in the event the contractor defaults in some manner, 1) the insurance company will either reimburse the project owner for the losses incurred or 2) secure the services of another contractor to complete the development.

Surety bonds are required by many private entities, as well as the majority of local and state governments. In fact, all construction contracts with the federal government valued at a minimum of $150,000 require a surety bond either as a condition of being awarded a contract or even during the bidding process.  

We'll continue to examine this topic in our next post, exploring the various types of surety bonds that can be secured.

Those who would like to learn more about their options for resolving a construction dispute or who need assistance with a construction project should consider consulting with a skilled legal professional as soon as possible.

Source: U.S. Small Business Association, "Surety bonds: The basics," Accessed April 2, 2015

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