Surety bonds are designed to act as a guarantee of services. They guarantee that you as a business professional will deliver goods or services and fulfill specific obligations that you have agreed to.
A surety bond is normally written with a specific dollar amount that is contractually agreed upon by three parties. The three parties include the person or business who agrees to fulfill the terms of the contract that is being bonded; the customer or client who will be paid if the contract obligations are not met; and the insuring or bond issuing provider.
The bond amount is also known as the penalty amount, because it is the penalty that gets paid if you fail to fully meet the commitment you agreed to in your contract. If you fail to meet the full terms of the contract, the surety bond pays your customer or client some or all of the total penalty amount your company is insured for.
Surety bond has been around in practice for many years. When a creditor gives you a loan that is secured against physical property such as your business office building, in this case, the office building is acting similar to a surety bond. If you fail to repay the loan amount in full, your creditor may elect to seize the office building as a form of payment.
Surety bonds and insurance coverage were developed in the late 1800s as a way to reduce the risks of signing large contracts with corporations. Back then, the bonds in the form of corporate assets provided a guarantee of either service or payment. When contractual obligations were not filled according to the agreed upon terms, the corporate assets were transferred as a form of payment for damages or loss.
In modern times there are many types of surety bonds, some of them enclude: Commercial, supply, contractor, securities, licensing and judicial.
Contract surety bonds are generally used by contractors and construction businesses to provide guarantees to their customers. The primary purpose of a contract bond is to guarantee that your company will perform at a level that is specified in the bond contract. Construction companies often need a surety bond in order to bid on government contracting assignments, and having this guarantee helps customers feel more at ease when hiring a company.
Contract bonds can cover a number of contracted obligations such as the contract bid, the delivery or completion date, performance levels and payment bonds in addition to others. Depending upon the coverage you elect for your company and the type of contract you agree to, surety bonds will cover the costs to your company if you fail to meet any of these types of agreements you contracted for.
For example, if your remodeling company has a performance bond and fails to complete the remodeling of a customer’s home at a specified timeframe, the surety bond will cover your customer’s cost for hiring another company.
Financial bonds include both financial guarantees and payment guarantee bonds. A financial guarantee bond is a guarantee that your company will use collected funds in a specified way. For example, if your run a retail convenience store, then you must collect sales tax from your customers. Financial guarantee bonds are a guarantee that your company will actually use the sales tax collected from your customers to pay the required sales tax in your state.
Payment bonds are similar but they apply specifically to labor and work materials. A payment surety bond guarantees that the work your company completes or delivers is fully paid for. This bond is meant to ensure customers that the materials you use in completing your contracted projects are free from third party liens or encumbrances.