Surety bonds are used to give customers and clients who make large purchases and sign major contracts a guarantee. These bonds are used in a variety of situations, ranging from construction projects to purchases of vehicles. Because they're used in a number of different situations, there are several different types of surety bonds. If your business needs to purchase a surety bond, here's a look at the different types that are available and what they're used for.
Bid Bonds Are Used When Bidding on Projects
Bid bonds are used for major projects that businesses or other organizations bid on. These bonds guarantee that the work a business promises to do will be done, or else the bond will pay the organization that hired the business.
Bid bonds are often used by construction business that bid on government-funded projects. If you own a construction business that repaves public roads, renovates government buildings, or builds government-subsidized housing, it may need to procure a bid bond when placing bids for projects.
Payment Bonds Are Used When Hiring Subcontractors
Payment bonds help ensure that the subcontractors a business hires are fully paid. These bonds protect both subcontractors, as they guarantee payment, and organizations that hire businesses for projects. If a business fails to pay its subcontractors, the subcontractors might try to seek compensation from the organization that hired the business.
Payment bonds are used by businesses that frequently hire or are dependent upon subcontractors. If you run a vending business in a stadium that relies on suppliers who are subcontractors, for example, your business might need a payment bond.
Performance Bonds Are Used to Guarantee Contracts
Performance bonds are used to guarantee that contracted work is done according to the terms of a contract. If a business fails to meet its obligations, a performance bond may pay the other party involved in the contract.
Any business that enters into large contracts, including contractors and vendors, might need to buy a performance bond. Performers also frequently need to get this type of bond. If you manage a band, for example, you might need to purchase a performance bond in case band members can't make it to a show. In such a situation, a performance bond would likely provide the venue where the show was to be held with financial compensation for sold tickets that must be refunded and any revenue the venue lost because of the cancellation.
For more information about these bonds and whether your business needs one, talk to a professional like those at NFP, P & C, Inc.