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Understanding how surety bonds work -- II

A few weeks ago, our blog started providing some basic background information on surety bonds, a mechanism designed to give project owners much-needed peace of mind by helping ensure that construction work proceeds as planned and all of the terms of a building contract are honored.

The focus in today's post will be on the different types of surety bonds.

The types of surety bonds available to builders

To recap, a surety bond comes into play when a project owner -- or obligee -- seeks the services of a contractor -- or principal -- to enter into a building contract.

The contractor who wins the bid will be required to secure a surety bond from an insurance company, which dictates that the insurance company will indemnify the obligee against any losses or hire another contractor to complete the project in the event of default.

There are four different types of surety bonds that can be secured in construction projects:

  • Performance bonds: These bonds guarantee that the contract will be carried out in accordance with its exact terms and conditions.
  • Bid bonds: These bonds guarantee that the bidder on a project will actually enter into the contract, providing the necessary performance bonds and payments if ultimately awarded the building contract.
  • Payment bonds: These bonds guarantee payment is made to all subcontractors and suppliers working on the project.
  • Ancillary bonds: These bonds guarantee that those elements of the contract that are considered integral, but not tied to performance, are carried out.

Consider consulting with a skilled legal professional as soon as possible if you require any type of assistance with a construction project, including surety bonds.

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

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