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Surety Bonds: Half Credit, Half Insurance Part 1

Due to the cost and risk associated with construction projects, the construction industry is responsible for approximately two-thirds of all surety bonds, which means you’re more than likely going to run into one at some point during your career. Surety bonds help ensure that everyone is meeting their obligations and help to fortify contracts so that you aren’t forced to rely on legal devices, such as a mechanics’ lien, to get paid after you’ve satisfactorily completed the project. That said, you’re equally responsible for fulfilling your side of the contract; otherwise, you could find yourself indebted to the surety.

In this two-part article, a Knoxville construction lien lawyer will cover everything you should know about surety bonds, so you can avoid a breach of contract while ensuring you get paid for your hard work.

The Parties Involved in a Surety Bond

Surety bonds are an important facet of contractor-owner agreements that rely on a third-party, or surety, to ensure that all parties meet their obligations. The three parties involved in a surety bond include:

  • The Principal: the purchaser of the bond who is guaranteeing that their quality of work will fulfill the terms of the agreement.
  • The Obligee: the party, typically an owner, who requires that the principal purchase a bond in order for them to avoid financial loss in the event of subpar or defective work.
  • The Surety: the issuer of the bond who guarantees that the principal will complete the work according to the agreement and compensates the obligee when the principal fails.

When the principal and obligee meet all the terms of the contract, the surety doesn’t have very much to do, which is a good thing. However, when you fail to perform the work as stipulated in the contract, the obligee can make a claim against the surety bond, which you will have to repay down the road.

How Do Surety Bonds Serve Contractors?

At this point, you might be wondering how a surety bond serves your best interests. In addition to qualifying your bids and increasing your chances of being awarded lucrative bids, surety bonds provide numerous benefits for contractors in both the public and private sector. For example, in the private sector, a surety bond helps transition construction financing into permanent financing. On public projects, surety bonds help pre-qualify contractors and provide payment protection for subcontractors. While the purpose of a surety bond is to ultimately provide the owner with the end product they desire, their use also indicates that an owner has the means to pay the contractor thus avoiding the need for a mechanics’ lien.

In part two, we will continue to discuss this important topic and explain why surety bonds are often regarded as half credit, half insurance.

If you would like to speak with a Knoxville mechanics’ lien law attorney, please contact us today.

Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.