Importance of a Surety Bond

December 13, 2022

A surety bond is a contract or agreement that binds the obligee, principal and surety.

A government entity is usually the obligee that requires the principal to obtain a surety agreement. Every type of business has different surety bond needs.

Trade licensing boards not only require contractors and service providers to have surety bonds but often require them for business owners in other industries.

Moreover, the government also requires certain agreements from contractors. 

In addition, most business owners and contractors can meet their needs by purchasing one or two of the most common types of contractor bonds, such as license and permit bond, construction contract, and bid bond.

On the other hand, some businesses have unique requirements that cannot be covered using the most common types of small business surety bonds.

These businesses may need to seek out specialty surety bonds, which are issued for various purposes.

Simply put, surety bonds are contracts between an insurance company and a principal that require the principal to fulfill certain obligations.

Government entities often mandate them to provide proof of financial responsibility.

If you’re looking for a surety bond, it’s essential to understand what kind of business you run, who your customers are, and their needs. 

The main types of surety bonds available include:

* Contract Surety – These cover contractors’ agreements with third parties like building owners. These can be single-performance or blanket bonds, depending on how often the contractor works with different clients on similar projects.

* Performance – It covers public projects such as road construction or bridge repair, where multiple parties may be involved in completing the job. Numerous subcontractors work under one contract, like a contractor hired by a city government.

Business licensing boards often require contracts for business owners in other industries. Here are the types of companies that typically require bond coverage:

* Contractors and service providers.
* Business owners in different sectors, for example, a doctor or dentists.
* Companies that provide services to the public, for example, an accounting firm.

What are bid bonds?

A bid bond is required by law in most states. Since it guarantees that the contractor will enter into an agreement with the project owner, it ensures the public from financial loss due to non-performance or poor performance on a given project.

The bond also assures that contractors will fulfill their obligations to the state because they’re financially responsible for any damage caused by fraud or negligence during construction projects.

For example, if the agreement states that if the low bidder backs out from the contract, the project owner has the right to the value of the bond.

Therefore, almost all contractors and service providers must get a surety bond before starting work.

While construction companies mostly require bid bonds, road paving, heavy civil, electrical and mechanical, snow removal, landscape contractors, etc., also need it. 


The above information should help you understand why getting the correct type of surety bond for your business is essential.

It guarantees your contract and that the job is completed on time and with the required quality. Contact reputed insurance agencies online if you have any concerns or need more information about specialty bonds. 

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