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Contract Bond Definition

There are multiple types of surety bonds, and it's important to understand what you need and why that bond is distinct. People have come to value many different kinds of surety bonds, which is reflected in the surety industry's record growth, with industry premiums doubling over the last two decades. This glossary entry focuses on one of the largest areas of growth – contract bonds.

What is a Contract Bond?

This type of bond is commonly used when forming contractual agreements for something like a construction project or an ongoing service arrangement. There are three parties involved:

  • The obligee requires the contract bond to be part of the agreement, sets the terms of the bond, and collects any payment for claims filed against the bond.
  • The principal must obtain the bond, pay the bond premiums and renewal fees, and pay for any claims filed against the bond.
  • The surety issues the bond. Surety companies initially pay for claims filed against the bond, essentially guaranteeing payment. Afterwards, they collect the debt from the principal.

Why are Contract Bonds Important?

All contracts require a certain amount of trust. Requiring bonds is a way to protect the obligee from any unethical or illegal behavior committed by the principal. Since the surety company guarantees payment of any valid claims, obligees know they can seek compensation if the contractual obligations are not met, making it easier to manage contracts. Even though bonds pay the obligee using the principal's money, both parties benefit from committing to contacts with clearly-defined obligations and penalties. Ultimately, contract bonds make it easier for unfamiliar parties to do business together.

How Do You Obtain a Contract Bond?

Now that you know the contract bond definition, complete an application with a reputable surety company. You will need to supply financial information so that underwriters can evaluate your credit risk. Based on that risk, they will quote you a price for the bond premium, typically 1-5% of the total bond amount. The bond is active as soon as the premium is paid.

If you still have questions about what is a contract bond or the contract bond meaning for your specific business, contact Viking Bond Service.

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