Surety bonds can serve a valuable purpose

As many contractors in Kansas have already learned, purchasing a surety bond is a requirement for most publicly contracted construction projects. It is a means for inoculating the project against the any vagaries and failures related to its contractors, and it is so effective at ensuring the completion of the project as outlined in the contract that an increasing number of private construction projects require a surety bond too.

Moreover, the bond involves a mutually and legally binding agreement among three parties, the principal, the obligee and the surety. The principal is the party assigned the work, such as individual contractors or a large construction company, as well as the party required to buy the bond. The obligee is the project owner who awards the contract for the work and who requires the bond. The surety is the insurance company that provides the bond. It is the surety company’s responsibility, in the event that the principal fails to produce the work outlined in the contract, to employ a new principal to complete the contracted project or to compensate the obligee for financial losses.

Surety bonds may be varied to protect other essential elements contained within a contract, including payment to subcontractors and workers. Because the successful completion of large developments rely on numerous independent parties with specialized functions, the prospect of the entire project collapsing on the failure of one of its pieces is too great for an obligee to accept without this kind of insurance.

Those affected by surety bonds often rely the counsel of business attorneys who are well versed in contract law. These attorneys may critically review the project contract to make sure the terms are practical, reasonable and fair from the perspective of the party they represent.

Source: SBA.gov, “What is a Surety Bond?“, December 23, 2014

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