WHAT DOES SURETY BOND MEAN?
A surety bond is an agreement that requires three parties. It provides protection and assurance to the obligee. The main intention of the surety bonds is to provide a shield to the obligee from the principal. The three parties refer to obligee, surety, and principal. An obligee is a person who purchases the surety bonds from the company. Surety refers to the company, that protects the obligee in the event of any default by the principal. The principal is a person who undertakes the project of construction and is liable to fulfill their obligations. In a unique sense, more or less surety bonds act as an insurance. Typically in insurance, the aggrieved party is insured in any unexpected events. Whereas, on the other hand, a surety bond shall provide compensation in any event of default made by the contractor.
COMMON CHARACTERISTICS OF THE DIFFERENT TYPES OF SURETY BONDS:
Some common elements are necessary to consider while understanding different types of bonds. These are as follows;
1] BONDING CAPACITY: The maximum amount of surety that can be availed is determined based on the contractor’s working capital and cash inflows.
2] WORKING CAPITAL: According to financial management, working capital refers to an excess of current assets over current liabilities. A surety company shall require the obligee to have at least 5% or 10% worth of working capital as compared to the bonded amount. Go to site to learn more about the working capital requirements for surety bonds.
3] BOND TERM: The general life of a valid bond ranges from 1 to 4 years. The terms of the life of a bond can be reviewed monthly.
4] BOND PREMIUM: The consideration charged by the surety company for their services is known as a bond premium. The premium charged by the company lies between 1% to 10% of the bonded amount.
DIFFERENT TYPES OF BONDS
There are several types of bonds, but the most common bonds used are court and contract surety bonds.
1] COURT SURETY BONDS: These bonds are purchased to mitigate the losses incurred in legal proceedings. The court bonds are sub-categorized into various categories. These include;
-> GUARDIANSHIP BONDS: These types of bonds are undertaken by minors or incapable person to ensure that their legal guardian makes a decision, which is best for their interest.
-> COST BONDS: These bonds are usually purchased to ensure that the opposing party compensates for all the cost of litigation incurred in legal proceedings.
-> ADMINISTRATOR BONDS: These types of bonds are purchased to provide a guarantee, that the administrator of an estate shall perform his obligation in compliance with applicable law.
2] CONTRACT BONDS: In simple words, contract bonds provide a guarantee that the project undertaken by the contractor shall be completed within the given period. Bid bonds, performance bonds, and payment bonds are the types of contract bonds.
CONCLUSION:
The surety bonds play a crucial role in project construction. Every project owner should purchase surety bonds, which will reduce the chances of risks.
