A surety bond ensures contract completion in the event of contractor default. A project owner (called an obligee) seeks a contractor (called a principal) to fulfill a contract. The contractor obtains a surety bond from a surety company. If the contractor defaults, the surety company is obligated to find another contractor to complete the contract or compensate the project owner for the financial loss incurred.
There are four types of surety bonds:
- Bid Bond : Ensures the bidder on a contract will enter into the contract and furnish the required payment and performance bonds if awarded the contract.
- Advance Payment Bond : Ensures the obligee that monies paid in advance will be reimbursed in the event of contractor default.
- Payment Bond : Ensures suppliers and subcontractors are paid for work performed under the contract.
- Performance Bond : Ensures the contract will be completed in accordance with the terms and conditions of the contract.