What is a surety bond? And why do construction companies use it?
The best place to begin when explaining the details of a Surety bond is with a good definition. A Surety bond is a financial tool used to ensure agreeable results and practices are reached and achieved when there are business deals being done within certain industries. There are basically three parties involved with than a Surety bond. There is the principal, the obligator and the issuer. The principal is the business or individual receiving an amount of money. The obligator is the government. And, the issuer is a bond company that takes on a bit of the financial responsibility should the principal fail to perform to expectations.
The simple fact is that every state within the United States has some form of Surety bond in place within its infrastructure. They are a key component that helps keep the GDP and domestic business cash flow flowing between the private and public sector within the US economic system. There are something like a loan, but at the same time they are a regulating tool used largely within the construction industry to make sure that the standards and qualities that citizens are used to living with are in fact a way of life. Surety bonds are something like what the FDIC is to the financial world except for in the business world and somewhat reversed, but the idea is the same. It is all about insurance and security.
As a matter of fact, not only are these Surety bonds effective in their purpose, but in some cases they are absolutely mandatory as regulated standards and practices in businesses especially when dealing with the public and its facilities, services or quality of life. However, in many cases, they are absolutely not necessary and there should be a good amount of research done before endeavoring on certain projects to make sure the matter of facts are absolutely clear on the subject. If in fact they are necessary for a business to exist or perform its duties, then there are companies that help find just the right Surety bond to meet their needs. These companies are necessary, because there are over 50,000 different Surety bonds available within the United States.
If Surety bonds are necessary for a business to operate there are definitely some questions that should be asked to make sure that the best bond is acquired and its requirements are fulfilled. The best aspect to consider with this type of bonds are the four different types that are available. These four different types of bonds are Bid, Payment, Performance and Ancillary. Each one has its own purpose and performs in a different way.
Bid bonds ensure that the bitter has certain monies ready when entering into the bond contract. Payment bonds make sure that issuers and other subcontractors are paid fairly for their performance. Performance bonds focus on the details of actions within a contract to make sure they are met. Ancillary bonds make sure that structures and detail surrounding a contract are met but it do not necessarily have anything to do with details of the contract itself.