A surety bond functions as an agreement among three parties. The surety agent pays a specific amount on behalf of the principal (the construction company) to post the surety bond. The bond forms an act of good faith between the principal and the principal’s client, also known as the obligee.
If the principal does not meet the terms of the agreement, the surety agent will pay the amount to the obligee. The surety agent may then pursue legal action against the principal for its failure to meet the agreement and to recover the surety funds.
Surety bonds differ in size, scope and terms. A typical construction contract bond is valued at 0.5 percent to 2 percent of the total job cost. The rates vary based on the type of project, the credit history of the principal and the probability that the bond will be forfeited.