WHAT IS A SURETY BOND AND ITS TYPES

2007-03-08 10:33:40

( Financial )



What is a surety bond?

A surety bond is an agreement among three parties composed of the surety, the principal and the beneficiary. The surety is obligated to cover the financial responsibilities of the principal to the beneficiary. Such obligation is stipulated in the agreement between the principal and the beneficiary.

Types of Surety Bonds

It is important to know the types of surety bonds to be able to determine further what is a surety bond. Contract and commercial surety bonds are the two types of surety bonds.

Contract Surety Bonds

Contract surety bonds are used in building and construction projects to provide assurance to the property owner that the contractor will comply with the agreements of the construction contract at an agreed date. It further assures the property owner that the contractor will hire the necessary laborers, sub contractors and suppliers to finish the construction project. It assures the property owner that the agreed financial amount will be used solely for the construction of the property.

Bonds related to bids, performance, payments, maintenance and subdivisions are the types of contract surety bonds being used in the market. Bid bonds are used for contract bidding to assure project owners that the contractor bid on the project in good faith and assures to provide the required performance for the project as well as provide the required payment bond. Performance bonds are used to protect the owner from financial loss in the event that the contractor fails to perform his responsibilities stipulated in the contract. Payment bonds guarantee to pay the subcontractor, laborer and suppliers included in the completion of the project. Maintenance bonds guarantee the owner against defects in workmanship or materials used in the project for a certain period. Subdivision bond guarantee a city, country or state that the principal will finance and initiate the construction of improvements in the area.

Commercial Surety Bonds

Commercial surety bonds are guarantees the compliance of the principal on the stipulated in the bond. Bonds related to licenses, judicial, public officials, federal and miscellaneous are included in commercial surety bonds. License bonds are required by law to operate businesses. Judicial bonds assure the compliance of fiduciaries to court orders. Public official bonds guarantee the performance of public officials on their duties. Federal bonds are required by federal government to non contract obligations. Miscellaneous bonds involve bonds related to workers compensation, security, lease agreement and payment of utility bills.

Knowing what is a surety bond and its types will help you know what bond to stipulate when you are implementing projects related to construction and commercial activities. Make sure though that you review the clauses indicated in the surety bond.


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