In essence, three parties are usually involved in a construction surety bond. They include:
The Principal
The principal is the party required to provide the surety bond. In a construction project, the party must qualify for the bond's purchase and payment as determined by the surety company underwriter. Here are some of the reasons why the principal buys a surety bond;
Full compliance with the contract terms
Keeping tabs on industry laws and regulations
Upholding the required ethical standards guarding business practices
The Obligee
The obligee is the party requiring the principal to provide the surety bond. Surety bonds are a must for public construction projects since the taxpayers are usually the financiers of these projects. Government agencies need a surety bond to assure the public that the funds are used responsibly. Other obligees may include private construction project owners, regulatory agencies, or a law court.
The Surety
The surety is the insurance company that protects the obligee against any construction risk. The surety company assures the obligee that the principal will honor every bit of the contract, including quality, law, and ethical standards. If a client makes a claim against the surety bond, the company investigates the claim's validity, and if found valid, the claimant receives a payout of up to a certain amount.