This article was created to show how surety bond works. The owners of contractor companies know little of surety bonds especially if they are start up contractor companies. Requirements are often stated as having to be bonded if you are a contractor. What does it mean to be bonded? What different bonds are available if any and how does one apply for such bonds? All of these good questions will be answered in this article.

There is fundamental terminology that must be understood. Bonds are written if and only if required by another party and involve three parties, thus the bond is a three party agreement. The three parties are the principal, the obligee and the bonding company. The principal is the contractor. The customer requiring the surety bond is the obligee. The bonding company or agent underwrites the bond. A contractor cannot self proclaim to be automatically “bonded” nor can he obtain a bond just for that reasoning. This misconception is common as the contractor must first qualify for a surety bond and there must be three parties involved. Another misunderstanding is that a bond and insurance are the same. Actually, a surety bond is more to the liking of a form of credit and far from an insurance policy. Underwriting a surety bond is similar to issuing other forms of credit like loans. Some specific bond types are contractor license bonds and a contract bonds. Contractors are required to obtain one or both of these surety bonds and these bonds guarantee precisely what they are called. A contractor license bond required by the state or local municipality guarantees that the contractor shall operate within the rules and guidelines of the license they hold with that government. A contract bond however guarantees that specific contract. Contracts vary and so does the bonds.