Surety Bonds

Bonding is routinely required on public projects.  The Miller Act prescibes the requirements for payment and performance bonds on federal projects.  Many states have statutes that enforce requirements similar to the federal Miller Act.  Whether or not private projects require funding is up to the parties involved in the project.  However, it is typical that Owners will require bonding projects greater than $15 million in value.

Surety bond: A contract among at least three parties: 1) The obligee - the party who is the recipient of an obligation; 2) The principal - the primary party who will be performing the contractual obligation; and, 3) The surety - who assures the obligee that the principal can perform the task.

How it Works:  Through a surety bond, the surety agrees to uphold — for the benefit of the obligee — the contractual promises (obligations) made by the principal if the principal fails to uphold its promises to the obligee. The contract is formed so as to induce the obligee to contract with the principal, i.e., to demonstrate the credibility of the principal and guarantee performance and completion per the terms of the agreement. The principal will pay a premium (usually annually) in exchange for the bonding company's financial strength to extend surety credit. In the event of a claim, the surety will investigate it. If it turns out to be a valid claim, the surety will pay it and then turn to the principal for reimbursement of the amount paid on the claim and any legal fees incurred. If the principal defaults and the surety turns out to be insolvent, the purpose of the bond is rendered nugatory. Thus, the surety on a bond is usually an insurance company whose solvency is verified by private audit, governmental regulation, or both.

Types of Surety Bonds: Several types of surety bonds are used heavily in the construction industry.  Types of bonds include:

    Bid bonds: Guarantee that a contractor will enter into a contract if awarded the bid.

     Performance bonds: Guarantee that a contractor will perform the work as specified by the contract.

    Payment bonds: Guarantee that a contractor will pay for services and materials.

     Maintenance bonds: Guarantee that a contractor will provide facility repair and upkeep for a specified period of time.

Miller Act:  Codified as amended at 40 U.S.C. §§ 3131–3134 the Miller Act requires prime contractors on some government construction contracts to post bonds guarantying both the performance of their contractual duties and the payment of their subcontractors and material suppliers.