Surety Bonds

What is a Surety Bond?
A bond is a guarantee of the performance of a contract or other obligation. Bonds are three party instruments, by which one party (the surety) guarantees or promises a second party (the owner) successful performance by a third party (the contractor). A bond is also an instrument of pre-qualification, whereby one party says to second party that the third party has been examined and found to be qualified to complete the obligation or undertaking in question.

Kinds of Contract Bonds
The bonds given by a surety in conjunction with construction projects are usually bid bonds, performance bonds, and labor & material payment bonds. A Bid Bond is provided as the basic instrument of pre-qualification. In this context, pre-qualification means that the surety has investigated the contractor sufficiently that it is convinced that the contractor can perform successfully on a given project. The bid bond states that the contractor will enter into a contract if one is offered, and the contractor will furnish whatever additional bonds are specifically required. If the contractor fails to do either, the bid bond specifies a penalty which may be paid to the owner as damages. The damages may be actual, or the difference between the contractor's low bid and the contract price the owner must pay to the firm to which the contract is ultimately awarded. In no event will a surety pay this penalty in an amount exceeding what is stipulated in the bond itself.

The Performance Bond states that the contractor will build whatever it is that has been contracted, in accordance with the contract plan and specifications. If the contractor fails, the owner has a right of action against the surety to secure completion of the project.

The Payment Bond states that those people supplying labor and materials on the project will be paid subject to restrictions and limitations imposed by statute or contract.

The First step is to fill out the NASBP Contractor Questionnaire.