Public Construction: Payment, Performance and Bid Bonds-a Look Under the Hood
Business Credit › Vol. 109 Nbr. 5, May 2007
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Summary
A surety bond is not an insurance policy -- it is a guarantee in which the surety guarantees that the contractor, called the "principal" in the bond, will perform the "obligation" stated in the bond. If the principal fails to perform the obligation stated in the bond, both the principal and the surety are liable on the bond. Recognizing the need to protect taxpayers from contractor failure, Congress passed the Heard Act on Aug 13, 1894. The Act required surety bonds on all federally funded projects. The Miller Act of 1935 was the last major change in the public sector and is the current federal law requiring bonds on federal projects. The three types of surety bonds are: 1. bid bonds, 2. performance bonds, and 3. payment bonds. Suppliers and subcontractors should attempt to secure a copy of the bond during the process of negotiating the underlying contract or as soon as possible thereafter.
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Public Construction: Payment, Performance and Bid Bonds-a Look Under the Hood
What is a surety bond? A bond is a contract, or a guarantee agreement that contains the promise of a third party, a bonding company or surety, to pay a fixed sum if certain acts are not performed. The acts are typically non-performance or non-payment. A surety bond is not an insurance policy-it is a guarantee in which the surety guarantees that the contractor, called the "principal" in the bond, will perform the "obligation" stated in the bond. For example, the "obligation" stated in a bid bond is that the principal will honor its bid; the "obligation" in a performance bond is that the principal will complete...
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