ABOUT SURETY BONDING

A surety bond is a bond that promises to take the liability for the default, misconduct, or any fraud. These bonds are considered to be different types of contracts. The unique feature of these bonds is that they require three parties for a contract. The parties indulged in the bonding contracts are the obligee, the principal, and the surety company, such as Alpha Surety Bonds. An obligee is a party who receives compensation in the event of any fraud.

 For instance, if the principal did not complete the project within the stipulated time or the project was not completed as per the requirements of the obligee, then in such cases, the obligee is entitled to claim compensation by the surety company for the loss suffered by him. A principal is a person who must complete the project within time and as per the specifications given by the obligee. A surety company usually undertakes a contract for a percentage of the premium of the consideration and provides compensation to the obligee in the event of uncertainty.

It is required by the principal to sign the bonded agreement before undertaking any contracts. Due to surety bonds, the construction industry has grown significantly. These will provide a guarantee to the project owner regarding the completion of his project on time and as per requirements as well.

Due to the usage of surety bonds, the investors have gained confidence, resulting in overall growth in the economic stability of such an industry. Some might think bonds are similar to insurance, but it is different. Sometimes, obligee and project owner can be used interchangeably and the principal can be called the contractor.

BENEFITS OF SURETY BONDS

Surety bonds offer several benefits to the owners of the property. By providing financial security to the project owner, it gives guarantees to the project owner. These might give a lot of psychological relief to the obligee. And in another aspect, it provides reasonable assurance about the background and qualification of the contractor. These will enable the project owner to select a reputable contractor for his project. Surety bonds also provide accountability for the work performed by the contractor. Due to the surety bonds, the contractor shall take the responsibility seriously. These might help in the completion of the work more effectively and efficiently.

TYPES OF CONTRACTS

There are various types of bonds issued in the construction industry. But there are two broad categories of surety bonds-Contract surety bonds and Commercial surety bonds.

1] CONTRACT SURETY BONDS:  A contract undertaken for a construction project is known as a contract bond. This contract will ensure that the contractor shall fulfill his contractual obligations within time. There are several types of contract surety bonds, including,

A] BID BOND: This type of bond generally offers financial security to the project owner. In the event of any default or misperformance, this bond will provide reimbursement to the project owner.

B] PAYMENT BOND: This bond will ensure that the contractor has made payment to all the suppliers and laborers.

C] PERFORMANCE BOND: This bond shall assure the project owner regarding the completion of the project within the time limit.

D] WARRANTY BOND OR MAINTENANCE BOND: This bond provides security that in the event of any default or material defects of the construction, the project owner is entitled to receive compensation for the damages suffered.

The contract surety bonds are required in the case of any construction contract valuing more than $150,000. Most of the places have this requirement for getting a contract surety bond.

2] COMMERCIAL SURETY BONDS: These bonds cover a substantial portion of surety bonds. It will ensure that the contractor shall fulfill his contractual obligation by undertaking commercial bonds. Commercial bonds are often required by the federals, other businesses, and the local governments. Commercial surety bonds are sub-categorized into five types of bonds.

A] JUDICIAL BONDS: These bonds are often required in legal proceedings to preserve the rights of the opposing case or other interested parties. Judicial bonds are also known as court bonds. They include attachment bonds, injunctions, and supersedeas bonds.

B] LICENSE AND PERMIT BONDS: These types of bonds are often required by the government, local bodies, and federal of a state, as a condition for getting a license or permit for several jobs and professionals.

 C] PUBLIC OFFICIAL BONDS: These types of bonds are generally required by statute or by a person holding office in a public company. These bonds are undertaken to safeguard the public from any fraud done by an official person.

D] PROBATE BONDS: These bonds are undertaken to administer a trust under the supervision of the court. These bonds are also called fiduciary bonds. Typically, these bonds include guardian bonds, trustee bonds, and executor bonds.

E] MISCELLANEOUS BONDS: These bonds are undertaken by a person under the circumstances, where a surety bond does not fit into any types of commercial bonds listed above.

CONCLUSION

Surety bonds are a crucial component in the construction industry. It offers various benefits, as its main agenda is to provide financial security to the obligee. In other words, these bonds assist the contractor in completing his contractual obligations. Surety bonds are then divided into contract and commercial bonds. These two types of surety bonds are again subdivided into other types. Surety bonds also increase the credibility of the principal regarding the completion of the project. As surety bonds suffer from inherent limitations of expensive obtaining costs. This might make it very difficult for small businesses to obtain a surety bond.  Surety bonds are considered a financial risk management tool, which helps in boosting the confidence of the project owners. Surety bonds also ensure compliance with related laws and regulations of the particular industry. Due to the lack of Awareness regarding surety bonds, many of the businessmen tend to lose the benefits and advantages relating to obtaining surety bonds.