Everything About Surety Bonds
You might’ve heard about surety bonds a lot already, but you are still confused about its purpose. Basically, a surety bond is a contract signed by three parties, and they are the principal, obligee, and the surety. However, it is not enough for you to know the parties involved in this contract in order to understand how surety bonds work. In this article, you will understand the importance of surety bonds and their purpose in less than ten minutes! And for more on surety bonds you can go to www.gadelaw.com.
Who Are The Parties Involve In A Surety Bond?
The principal is a business or a contractor who will purchase a bond to guarantee clients that it will accomplish the task or the project that has been agreed upon. The obligee is the person or another business who requires the bond to decrease the risk of financial loss. The third party in the contract is called the surety which is the insurance company who will finance the bond with a certain amount of money in case the obligee is not able to accomplish the task or the project.
What Are The 2 Types Of Surety Bonds That Your Contractor Must Have?
Hiring a reliable contractor is essential especially for big projects where an enormous amount of money is ready to be invested. Working with someone who does not have a surety bond might increase the risk for you. But you can avoid this by looking for a contractor who has either of the two kinds of surety bonds. These two types of bonds will ensure you that you will receive compensation if ever a contractor harms or fails to finish the project for you.
• Performance bonds – This kind of surety bonds protect the obligees in case contractors default or fail to do their commitments for some reason. If you are hiring a contractor to do a construction work for you, then you should ask them about their performance bonds.
• Payment Bonds – Subcontractors also have to protect themselves from contractors who fail to give payments for the job. This guarantees subcontractors that they will still receive the right amount of compensation in case such thing happens to them.
If you find a contractor who has these type of bonds, then it must be an indication that they are reliable already because insurance companies still do rigorous background checks before issuing surety bonds to someone.
However, this is still needed because some problems and challenges may still arise between the principal and the obligee due to their differences. The claiming process can be stressful for everyone, so it is still better to avoid any issues. This can be done by communicating well for the project and understanding each others’ differences.
Surety bonds help contractors, subcontractors, and clients feel safer. Yes, it is hard to trust someone with a task like a construction project, but with surety bonds, you will not be at a significant loss if ever problems arise. Now that you know the importance and the role of surety bonds in a project, you can protect yourself from incurring losses.