The Importance of Surety Bonds in Construction

Risky Business

Construction is a risky business. One-half of all construction firms in business today will be out of business six years from now, according to the Associated General Contractors of America. An economic downturn, labor difficulties, material shortages, equipment problems, and a host of many other problems can cause a contractor's business to fail leaving projects at a standstill.

No construction project owner, public or private, can afford to gamble on a contractor whose responsibility is uncertain or who could end up bankrupt halfway through the job. And how can a public agency, which uses the low-bid system in awarding public works contracts, be sure the lowest bidder will be dependable?

A surety bond provides financial security and construction assurance on building and construction projects by assuring project owners that contractors will perform the work and pay their subcontractors, laborers, and material suppliers.
In other words, a surety bond is a risk transfer mechanism where one party guarantees to another that a third party will perform a contract. 

The three parties involved are: 

1. the surety 

2. the owner 

3. the contractor. 

This three-party system involves three types of surety bonds: the bid, performance, and payment bond.