What is a Surety Bond?

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Definition and Benefits of Surety Bonds

A surety bond is simply an agreement between three parties:

  • Principal: the person who needs the bond

  • Obligee: the person who is protected by the bond, such as the government entity

  • Surety: the person who issues the bond


  • Relieves the project owner of risks of financial loss as a result of liens for unpaid subcontractors and suppliers. They also protect taxpayer money for public projects.

  • Transition between construction of the site and permanent financing is smooth because there are no liens.

  • Surety company can offer assistance such as technical, managerial and financial – to move the project along and reduce the chance of default (project failure).

  • Surety company arranges for project completion, if the contractor defaults.

Types of Surety Bonds

  • Bid Bond – provides financial assurance that the bid has been submitted in good faith. The contractor intends to fulfill his/her responsibilities at the price bid and will provide necessary performance and payment bonds.

  • Performance Bond – protects the project owner from financial loss if the contractor fails to perform the duties outlined in the contract.

  • Payment Bond – guarantees that the contractor will pay subcontractors and laborers, and for supplies relating to the project at hand.

Obtaining a Bond

Before a surety can provide assurance that a contractor can perform properly, they must go through the prequalification process. In this process, the surety conducts a review known as underwriting – analyzing the contractor’s business operations and determining their ability to meet current and future contractual obligations. The surety will not issue a bond until they are satisfied that the contractor can fulfill his/her contractual obligations. The surety looks at the items listed on the slide during the prequalification process.

Costs of Bonds

The charge for a bond, or the bond premium, is broken down as such: no charge for the bid bond, 0.5 to 2 percent of the contract amount for the performance bond and no charge for the payment bond when purchased with the performance bond. In addition, there is a fee for surety’s underwriting services known as the surety bond premium.

Utilize these resources when receiving bids:

Surety Bonds can be complicated.

Let Arnold Insurance Agency help you along the way!