The most prevalent bonds that fall in the contract bond realm are bid bonds, payment bonds and performance bonds. Mainly associated with publicly funded projects, which fall under the jurisdiction of the Miller Act, these bonds are three-party agreements that provide protection to the owner (known as the obligee) that the contractor (known as the principal) will honor its successful bid price (bid bond) established during a public/private bid OR prosecute the work specified in the contract between owner and contractor per the terms of the agreed upon contract (performance bond). The (payment bond) guarantees the payment for all materials, subcontractors and vendors that are required for successful completion of project. The surety company is the third party that issues the bond(s) providing owner (obligee) with the “guarantee” that the contractor (principal) will fulfill its contract obligation.
The very FIRST thing you should KNOW about a performance and payment bond is that IT IS NOT AN INSURANCE POLICY. It is much more like establishing credit (think of obtaining a mortgage for a new home). As a contractor, your ability to obtain such bonds and the amount of bonding credit you qualify for will be based on the financial strength and experience your firm can demonstrate. It is a complicated process and hiring a qualified surety broker is only part of establishing a team of professionals that will help reach the highest levels for obtaining suretyship. There are constant changes in the surety industry because of its reliance on many factors, such as the availability of public work (public funding), the reinsurance market, and the economy as a whole. Navigating the best path for your individual business is where the journey begins.
Some other types of bonds you may run across will be subdivision bonds, site plan bonds, maintenance bonds. Again all of these bonds will basically provide assurance to an owner (obligee) that an agreed upon contract will be prosecuted successfully by the contractor (principal).
View the checklist of items we require from clients to begin qualifying them for Surety Bond credit.