So few people understand what surety bonds are or how they can benefit their business and this is unfortunate because they can be so helpful in a range of multi-party contractual agreements. Whilst surety bonds may sound like they are a type of insurance, they are actually not alike at all. Surety bonds provide all the different parties in an agreement with extra protection with regards to performance, finances, and maintenance. There are various types of surety bonds that can benefit a business and in order to choose the right one, it is important to know exactly how they work and the advantages which each can provide.
This article is a guide to everything you need to know about surety bonds.
The Four Categories of Surety Bonds for Businesses
For business applications, the most useful type of surety bond is known as contract bonds. There are four categories of contract bonds, each of which provides a specific benefit to the various parties in a contract. These four categories are performance bonds, bid bonds, maintenance bonds, and payment bonds.
Performance bonds make sure that a contractor who is hired by a business will do the work that has been agreed in the contract. The experts from Netsurance.ca explain that this is useful in so many situations as it ensures the principal (the party which hired a contractor) that their work will be completed. There are many examples where a contractor has performed a sub-standard job and the principal is left without recourse. A performance bond prevents this from happening.
Bid bonds are used when a company or party wants to make a bid for a contract. It ensures that if their bid is successful, they will fulfill the financial obligations of the bid. Bid bonds are important because it means that they have the financial means to complete the project and so no one is left short.
Payment bonds make sure that there are no outstanding fees or costs that are left unpaid after a job is done. These can include the costs of materials and labor and so all parties can be assured that they won’t be left in the red as long as the job is completed according to the contractual agreement.
Maintenance bonds ensure that if there are essential repairs or maintenance that need doing after a job is done, the contractor will return and do them, or will pay for them to be done. This is necessary for the principal as it prevents contractors from leaving jobs incomplete and moving onto the next one.
The Parties in a Surety Bond
There are three parties in a surety bond; the two parties which are agreeing on a contract exchanging money for services, and a third party which ensures that the other two parties meet their obligations as laid out in that contract. Each of the three parties has its own role to play to ensure that the surety bond is effective.
The principal, as mentioned above, is the party in the contract who receives the services that are laid out in the terms of the agreement. If we take a construction project as a typical example, the principal will be a construction firm that hires a contractor for a project.
The obligee in a surety bond is the party that is hired by the principal. In the example of a construction project, the obligee will be a contractor such as a plumbing or electrical firm that will perform the services laid out in the agreement.
The surety is the third party which only exists in a surety bond. Their role is to ensure that the other two parties fulfill their sides of the agreement.
How a Surety Bond Works
When we enter into any kind of agreement, we accept that there is some amount of risk present. What a surety bond does is reduce that risk as the surety bond holds the other two parties to account. If, for example, the obligee is an electrician who is hired to rewire a building, but when they finish the wiring is faulty, the surety will make sure that the obligee returns to fix the job. If they don’t, the surety will pay the principal their money back, and will then go after the obligee for the money plus extra. The same will happen if the obligee completes the work as laid out in the contract but then the principal refuses to pay.
Surety bonds are so useful in a range of business arrangements to ensure that both the principal and the obligee are protected. If either of the two parties shirks on their responsibilities, the surety will compensate the other party and then take measures to get their money back with a significant extra charge. If you are looking to enter into a new business arrangement, be sure to look further into surety bonds to see how they can benefit you.