UNDERSTANDING CONTRACT BONDS - PART 1

Contract Bonds are surety bonds that are designed to protect project owners against contractor default. Many times, a project owner (the obligee) will require the contractor they have hired (the principal) to obtain a contract surety bond. In the event that the contractor would fail to fulfill the terms of the contract, the contract surety bond would guarantee that the surety would find another contractor to complete the job or compensate the project owner for financial loss incurred. The majority of government jobs will require that contractors be bonded, as contract bonding ensures that taxpayers are not left on the hook to fund job completion should a contractor fail to do so.

In addition to the financial guarantee that a contract surety bond provides, the process of obtaining a contract surety bond provides an independent third party opinion that a contractor is qualified to perform the job. As part of the underwriting process, sureties are able to access and analyze confidential information like credit history and financials. The surety also looks at the contractor’s experience and job completion history. The surety only wants to issue bonds to individuals and companies that they feel have very little risk of having a claim filed against their bond. As you can see, it is an assurance to the job owner to know that a contractor has gone through the underwriting process and is deemed fit to qualify for contract bonding by the surety.

Now that you have a better understanding of what a contract bond is, next time we will go over the different types of contract bonds which include: bid bonds, performance bonds, and payment bonds. Bonding requirements vary by state, so contact Reeder Bonds with any Colorado surety bond questions!

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