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Also referred to simply as "bonding," a surety bond is a three-party relationship similar to a credit transaction. It is where one party (the surety) provides a financial guarantee for the second party (the contractor) to a third party (owner of a project). The surety bond is a promise by one party to guarantee that the second party will successfully perform and/or pay all legally obligated costs on the project to the third party. If the surety pays a claim against the bond, they will require the principal to reimburse them for the amounts paid.
The most common type of contractor's bonds are as follows:
Bid or Proposal Bond - This guarantees an owner (obligee) that a party bidding for a contract will, if the bid is accepted, enter into a contract and furnish the other necessary bonds.
Performance Bond - This guarantees the owner that work will be completed according to the contract specifications. A performance bond is the key bond in a work project because the owner of a project not only wants the work completed -- usually within a specified time -- but also completed according to specifications.
Payment Bond - This bond, also referred to as a "labor and materials" bond, guarantees that bills for labor and materials used in the work project will be paid as they become due.
Examples of Bonds Available
- Contractors License Bond
- Produce Dealer Bond
- Subsurface Sewage Disposal Bond
- Water Well Driller Bond
- Business Dishonesty Bond
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