What is a Surety Bond?
A surety bond ensures contract completion in the event of contractor default. A project owner (called an obligee) seeks a contractor (called a principal) to fulfill a contract. The contractor obtains a surety bond from a surety company. If the contractor defaults, the surety company is obligated to find another contractor to complete the contract or compensate the project owner for the financial loss incurred.
There are four types of surety bonds:
1) Bid Bond: Ensures the bidder on a contract will enter into the contract and furnish the required payment and
performance bonds if awarded the contract.
2) Payment Bond: Ensures suppliers and subcontractors are paid for work performed under the contract.
3) Performance Bond: Ensures the contract will be completed in accordance with the terms and conditions of
the contract.
4) Ancillary Bond: Ensures requirements integral to the contract, but not directly performance related,
are performed.
When do I need a surety bond?
Any Federal construction contract valued at $150,000 or more requires a surety bond when bidding or as a condition of contract award. Most state and municipal governments as well as private entities have similar requirements. Many service contracts, and occasionally supply contracts, also require surety bonds.
http://www.sba.gov/content/surety-bonds-basics