Surety bonds are a form of consumer protection wherein one party (called a surety) guarantees performance, delivery or payment by a second party (the principal) to a customer (the obligee). The purpose of a surety bond is to guarantee that a consumer does not suffer loss as a result of failure of the principal.
Commonly used in the commercial construction sector, surety bonds guarantee the validity of bids (bid bonds), adherence to construction schedules and specifications (performance bonds), and payment of subcontractors and suppliers (payment bonds).
Under the provisions of the Miller Act, passed in 1935, all public works projects must have a performance bond if their value is $100K or higher, and payment bonds for those over $25,000. Most states and the District of Columbia have their own laws requiring surety bonds to guarantee public projects. While surety bonds are not required for private projects, they are highly recommended, as they are the only way to have coverage for 100% of the value of a project.
There is no cost to the obligee for surety bonds. Payment of premiums is the sole responsibility of the principal. The amount of premium a principal pays for a surety bond depends on the surety’s assessment of the risk of loss, but typically range from one to two percent of the contract value. In the U.S., annual surety bond premiums average $35 billion.
In addition to the public works and construction surety bonds, other forms of payment, performance, or delivery guarantees include, Importer Entry Bonds, car dealership bonds, bail bonds (which are intended to guarantee that an accused makes scheduled court dates), and even the deposits sometimes required by public utility companies.
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