When it comes to most goods and services, you perform the task and someone pays for it. It’s as simple as that. However, construction work is quite different. Whether someone is building a home or a skyscraper, construction companies, as well as their clients, rely on bonds. There are several types of bonds in construction.
A bid bond ensures the construction company actually performs the project if they win the bid. This type of bond protects a project owner from awarding a project only for the construction company to say they won’t complete it unless they receive more money.
Construction companies don’t purchase bonds only to appease clients. They also hold them to protect independent contractors and suppliers. A payment bond ensures the people working on the job or providing the supplies for it receive their agreed-upon payment, even if the project is pulled for some reason.
Finally, there are performance bonds. These bonds protect the project owner by ensuring the job is completed according to terms. This prevents contractors from pulling out of jobs for unnecessary reasons or from prolonging them to earn more money. Source: Daniels
Regardless of the type of bond, they all require a principal, an obligee, and the surety. The principal is the contracting company, while the obligee is either the independent contractors and suppliers or the project owner. The surety is the third party, which is responsible for providing the money or hiring new contractors should something go wrong in the original deal.