Surety 101

What is Surety?

The concept of surety goes back thousands of years. There is mention of it in the bible and numerous historical documents. Surety has aspects in common with insurance and others in common with banking.

A surety bond is a written document in which one party (the Surety) guarantees a second party’s (the Principal) performance to a third party (the Obligee) for the Principal’s failure to perform an obligation. The Principal has the duty to perform the obligation for the benefit of the Obligee. The Surety guarantees fulfillment of the Principal’s obligation. The Principal compensates the Surety for its indemnifying it to the Obligee. There are numerous types of surety bonds but most fall under the heading of Contract Surety or Commercial Surety. Most construction surety is Contract Surety.

In the construction arena, this usually means that the Surety is guaranteeing the contractual performance of a contractor to either another contractor or to a construction owner. In the event that the contractor is unable to perform its contractual obligations, the surety steps in to help rectify the situation.

The most common Contract Surety bonds are Performance Bonds and Payment Bonds. The Performance Bond guarantees that the Surety will step up in the event that the Principal is unable to perform its contractual obligations. The Payment Bond guarantees that certain subcontractors and suppliers to the Principal are paid. Almost all public construction projects require Payment and Performance Bonds. Private construction projects can also require these bonds.