Performance and Payment Surety Bonds 101

Surety bonds may seem like a big, scary topic, but really it’s as simple as a financial guarantee between three parties: the principal, the obligee and the surety. What role do these parties play?

  • Principal: This is the contractor who obtains the bond in order to meet city, state or federal regulations.
  • Obligee: This is the project owner who is protected by the bond.
  • Surety: This is the company that issues the bond.

If the principal fails to meet expectations as detailed in the project contract, the surety is responsible for compensating the obligee for losses. The principal must then reimburse the surety for those expenses.

Performance and payment bonds are two of the most common types of contract surety bonds; in fact, they’re often underwritten together. Contractors are often required to obtain performance and payment bonds if they wish to work on public projects. After a project bid is won, a performance bond ensures that the winning contractor promptly begins work according to the contract. Meanwhile, a payment bond ensures that subcontractors, suppliers and laborers are paid fairly and in a timely manner.

Contractors with good credit can expect to pay a premium of one to five percent of the total bond amount. For instance, you’ll be responsible for a one-time fee of $1,000 to $5,000 for a surety bond worth $100,000. Various factors contribute to the amount you’ll be expected to pay. For a more accurate quote, contact your independent insurance agent today.

Protect your contracting business. Call Ed Weeren Insurance Agency at (512) 454-5266 for more information on Austin surety bonds.