Surety- Guarantees the bond and assures to the obligee that the principal will perform the contract.
Obligee- The project owner who requests the bond.
Principal- The contractor who performs the contractual obligation.
Surety vs Insurance
Surety is not written the same as insurance. Surety bonds are based on an underlying contract, covers all defaults without regard to fault, are three party contracts, and are not cancelable. Underwriting expects no losses so the surety may require shareholders to pledge personal assets or collateral.
Bid Bond - Guarantees that if the contractor is awarded the job that they will agree to perform the work as quoted and will provide any bonds required by the contract.
Performance Bond - Guarantees that the contractor will perform the work in accordance to the construction contract.
Payment Bond - Guarantees that subcontractors and suppliers will be paid for labor and materials.
Surety underwriting is similar to credit underwriting for loans. The underwriting is done on an as needed basis as contractors take on new jobs. Underwriting review will include analyzing contractor's financial statements, work in progress, management experience, and previous performance. In some underwriting cases the surety may require terms that could include collateral or funds control.