For many types of business, a surety bond can be incredibly useful, but there are still a lot of businesses which are not informed about how surety bonds work and how they can benefit them.
A surety bond gives added extra protection to a deal that does not have the same level of security as a traditional contract or agreement. There are many business owners who think that surety bonds are the same as insurance bonds, but they are actually very different. To understand what a surety bond is used for and to appreciate the benefits, it is first necessary to understand the different types of bonds available.
To help all the businesses looking for extra protection in their contracts, this article is a guide to the different types of surety bonds and how to use them.
What Are the Surety Bond Options Available to Businesses?
There are numerous types of surety bonds available, but for most businesses, the most commonly used are known as “contract bonds” because they protect the two parties in a contract.
The experts from SwiftBonds.com explain that contract bonds do this by introducing a third party called the “surety”, and we will explain more about the role of this third party later in the article. It is first important to know the differences between the four types of contract bonds, which are maintenance bonds, payment bonds, bid bonds, and performance bonds.
Maintenance bonds protect businesses as they ensure that a contractor hired by the business will come back and finish or repair any job which needs extra work. This is essential as otherwise, the business will have to foot the bill to hire another contractor to come in and get the work up to standard.
If the contractor refuses to return, the surety will give the business the money that is needed for the extra work and will then get it back from the contractor. This means that the business does not have to chase the contractor or have any lengthy delays for the work to be done.
Payment bonds protect contractors as they ensure that anyone who has hired the contractor to do a job pays them in full for the work. This is essential for the contractor as it means they can rest assured they will be paid in full and will be able to pay their staff, materials, and equipment costs, as well as any other financial obligations, and move onto their next job.
If the business refuses to pay, the surety will pay the contractor and will then take the legal steps necessary to get the money back.
Performance bonds protect businesses that have hired a contractor as they make sure that all work is done to the standards which were agreed in the contract between the two parties. This means that the contractor will be more conscious about doing a good job, as if they don’t, they won’t get paid.
If the contractor doesn’t do the job as specified in the contract, the surety will pay for another contractor to come and take over the job and will then get this money back from the original contractor.
Bid bonds protect businesses or entities which are offering a big contract for companies to bid for. They ensure that once the contract is awarded, the successful bidder has the finances to do the job, as stated in the contract. This is important as it stops bidders from trying to pretend they can do the job and then running out of money and asking for more in the middle of the project.
Who Are the Three Parties Involved in a Surety Bond?
The surety is the impartial party that only surety bonds have. The surety is legally empowered to ensure that the other two parties live up to the contract. If they don’t, the surety pays the affected party the money they need and then takes legal action against the responsible one.
The principal is the party who pays for a specific job or service to be done. Surety bonds are most commonly used in the construction industry so a principal is typically a construction company who subcontracts an electrical or plumbing firm to work on a big project.
The obligee is the party who is paid for their services by the principal. In the construction industry, the obligee would be the electrical or plumbing firm who is hired for the big project.
Surety bonds are very useful for many types of business agreements, and if you are looking to hire a contractor or you are a contractor entering into an agreement, it is always advisable to get the extra protection which a surety bond provides. Surety bonds ensure high standards of work, on-time payment, and honesty and transparency from the principal and obligee.