What Is a Surety Bond, and Is It a Good Investment?


Quick Answer

Surety bonds are a guarantee that, even if a contractor defaults, the contract is completed, according to the U.S. Small Business Administration. This type of bond is not an investment but instead is something that a contractor purchases as part of winning a project.

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What Is a Surety Bond, and Is It a Good Investment?
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Full Answer

Surety companies provide surety bonds for contractors. If the initial contractor (known as the principal) goes into default, the surety company has to find a different contractor to complete the project. If the surety company cannot get another contractor to finish, the company must reimburse the project owner (known as the obligee) for any financial losses that result, as stated by the U.S. Small Business Administration.

Four different types of surety bonds provide security for projects. Bid bonds guarantee that the bidder assumes the contract and provides the necessary performance bonds and payment upon award. Payment bonds ensure that subcontractors and suppliers receive their payment for the work they do on the job. Performance bonds guarantee that the contractor finishes the job according to the dictates of the contract. Ancillary bonds guarantee that any other contractual requirements that do not directly relate to performance are fulfilled. As of 2015, any construction contract for the U.S. government with a value of $150,000 or higher mandates a surety bond either while bidding or as a condition of receiving the contract, notes the U.S. Small Business Administration.

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