A surety bond is a bond issued by a third party who guarantees that a second party will provide the required service to their client. Sureties provide the buyer of a service with the confidence that they require to continue in a business relationship amidst a situation that includes risk. In essence, they provide a guarantee that should a contractor not meet their contractual obligations the financial risk to the buyer is mitigated. If things don?t work out as planned, the surety provider will meet the financial obligations of the contractor and then seek to get the money back from them.
In the construction industry, surety bonds are used extensively. In fact, about two-thirds of all sureties that are used in industry occur in the building industry. Such bonds may be used in construction in a number of ways. For example, a bid bond will guarantee that a contractor will engage on a contract should they win a tender. A performance bond relates to the specific obligations of a contract and guarantees that the contractor will complete all the relevant requirements therein. A maintenance bond ensures that a contractor meet the repair and maintenance requirements of a facility or building after construction.
All these types of surety bonds are very specific in their contractual scope, enabling clearly delineated terms that must be met by the contractor. Sureties are also used in other industries and are a useful tool to enable business to be transacted without fear on the part of the buyer.
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