In the construction industry, many contractors need a surety bond in order to move forward with a project. For those who are unfamiliar with these types of bonds, they can be confusing because they function as a kind of insurance where three parties are involved. Surety bonds are contractual agreements between a principal, the person who obtains the policy, an obligee, the person or organization that requires the bond, and a surety, the party providing the bond. The surety provides a guarantee that the principal will uphold its part in the agreement to the obligee.
There are a few key terms to be aware of when thinking through surety bonds. The bonded amount is the worth of the bond whose maximum possible value is determined by a bonding capacity. The bonding capacity is determined by business equity and working capital, which is assets minus liability. The bond term is the length of the agreement, which usually ranges from one to four years. Finally, the surety will require the principal to pay an annual bond premium of up to 15% of the bonded amount.
Surety bonds have a lot of details that must be carefully worked out so contractors can proceed with their projects as planned. Trusting an experienced provider of surety bonds is essential to secure success.