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How Surety Bonds Work in Construction

For construction projects, surety bonds are often required by municipal agencies and instill confidence in your company. Let’s take a closer look at how they work.

What is a Surety Bond?

Surety bonds involve three parties:

• The principal (the construction company/contractor)
• The obligee (the municipal agency)
• The surety company

How it works:

1. The principal promises to perform their work as contracted by the obligee.

2. If a construction company fails to meet their contractual obligation for a project, the public or the government agency can file a claim to the surety company.

3. The surety company settles the claim with a financial sum or assigns a new contractor to take over the project.

4. The original contractor is responsible for the amount paid on the claim.

Types of Construction Surety Bonds

Bid bond

• Necessary for the bidding process
• Protects obligee if contractor is awarded bid but fails to sign contract or provide required bonds
• Weeds out unqualified construction project bidders

Payment bond

• Ensures workers, subcontractors, and material suppliers receive payment from contractor

Performance bond

• Protects taxpayers from financial loss should contractor fail to perform duties in accordance with contract terms and conditions

Why a Surety Bond is required?

• Protect the general public
• Ensure project completion
• Ensure payment for all workers and subcontractors
• Create easy transition from financing construction to permanent financing
• Allow for prequalification of contractors

What You Need to Apply for a Construction Surety Bond

• Contract bond application
• Copy of contract (portion that pertains to the insurance and bonding requirements)
• Bond form
• Financial statements
  *Larger contracts require more documentation

To learn more or to apply for a construction surety bond today, visit PerformanceSuretyBonds.com