Surety Bonds: Their Many Useful Forms
Surety bonds are relatively easy to understand. They act as insurance between a contractor and a project owner to ensure the completion of a project. Because there are many types of surety bonds across industries and project types, it’s important to know the differences between them. A contractors bond is the most common type, but there are commercial surety bonds too.
What Is a Surety Bond?
Not only do surety bonds guarantee the completion of a project, but they also insure against particular risks. Risks can change depending on the industry or the type of project contracted. For example, special risk bonds provide coverage for the securities industry. Because each bond is uniquely tailored to meet your needs, you must work with a professional to determine the particulars of your bond.
Types of Surety Bonds
Contract surety is the most diverse type of surety bond. Depending on state law, project owners and governments may require contractors to have several contract bonds. These include:
- Bid bonds. This bond protects the project owner if the bidder who won the project does not uphold the contract. It also protects the project owner if the bidder does not provide the surety bonds or other securities needed to complete the project.
- Performance bond. This bond protects the project owner if the contractor defaults on the contract, does not complete the project, or performs shoddy work. For example, a performance bond protects you if the contractor you hired to do wiring installs faulty equipment.
- Payment bond. This bond guarantees that the contractor pays all bills associated with the project, such as labor and material. A payment bond also protects project owners from unforeseen charges or overcharges for any part of the project.
Commercial projects have their own set of surety bonds. Individuals and businesses can require them. The most common surety bond is a license or permit bond, which allows a business owner to engage in business or to exercise certain privileges within the business. These bond types include tax bonds, warehouse bonds, or performance and payment bonds. License and permit bonds may be jurisdiction-specific.
Certain businesses must have special bonds. For example, an insurance firm must carry an insurance agent bond that allows him or her to sell the product within a certain jurisdiction. Mortgage brokers and lenders must carry mortgage bonds to lend money and to ensure that they operate under applicable state and federal laws. Electrical contractors may need to post a bond as part of their licensing requirements and to ensure that they will follow all local and state electrical codes.
Bonds for Small Business Owners
Today, more people leave traditional jobs to start small businesses. Before you open a new business, investigate what type of insurance bonds you may need. As previously noted, construction workers may require several surety bonds. Similarly, collection agencies, auto dealers, and notaries need business-specific bonds too. Such bonds protect clients from unethical actions. For example, a cleaning service’s surety bond protects homeowners from theft and damage that may occur when house cleaners enter homes.
Like construction, the judicial system has its own set of surety bonds. These court bonds protect plaintiffs and defendants in all cases. They also protect the public from unethical actions, such as a court official’s failure to perform duties.
Additionally, courts or statutes can require administrators, executors, guardians, conservators, and trustees to obtain probate bonds. These people are often administering a trust or otherwise handling money under court supervision. These bonds guarantee the honest and faithful performance of duties.
Are Bonds Expensive?
Surety bonds are usually inexpensive and fairly easy to obtain. Most businesses consider them a basic expense. When determining the bonds you need, always investigate your particular business and the project types it handles.