Surety bonds are most simply defined as follows: Party A (the principal) promises to do a job for Party B (the obligee). And Party C (the surety) promises to reimburse Party B if Party A does not meet their promise.
The surety bond is typically bought from an insurance company. It's typically bought by the principle and procured in the same manner as any other insurance policy. Essentially the contractor is insuring their own work.
On some projects, this may be an additional investment of time and money that is simply not worth the added hassle. On others, it may be a necessity.
So, when are surety bonds worth it?
- Government contracts. Government jobs usually require private contractors to cover their obligations with a surety bond.
- High cost projects. The contract is too expensive for a contractor to cover themselves should something go wrong.
- Contract bidding. When you have two contractors with the same experience, offering to do a job for the same price, the contractor offering to guarantee their work through a surety bond will have the edge over their competitor.
Surety bonds are typically recommended for big contracts. They are often necessary for government contracts, or on any job where the client mandates it. Many contractors choose to forego the surety bond when the task is relatively small. That is, building a custom mansion will almost certainly require a surety bond, given the money and other resources in the contractor's hands. Installing a new sink in a client's kitchen, on the other hand, isn't going to wind up being a major expense should the contractor be unable to meet their obligation. Most of the risks involved should already be covered by general liability and builders risk insurance.
In short, a surety bond is worth it when it's mandatory, when it makes your bid a little more attractive, or when you just want that extra bit of peace of mind.