If you are someone who currently offers contracted services to large corporations or government entities, you are far from alone. In the United States, the federal government employs over 11 million contractors every year, while local governments and private companies hire countless more. Without a doubt, contractors play an important role in helping organisations function.
While there can be benefits to doing this type of work for a public entity like a government agency, it is important to make sure you have all of the work details and legalities squared away. After all, when it comes to contracting your services to public organisations, there can be a lot more at stake.
Because public institutions ultimately serve voters, elected officials must ensure accountability happens if contractors do not provide the services an agency pays them to do. In a nutshell, this article explores what makes this sort of accountability possible: surety bonds.
Essentially, a surety bond is a type of promise that one party makes to cover the losses of a second party. If a third party does not do the work it previously promised the second party it would complete. With these bonds, the three parties to consider include:
- The Principal Party
- The Obligee Party
- The Surety Party
When it comes to who is who, the principal party is the individual or business that promises to do something in exchange for payment from the obligee party. On the other hand, the obligee party needs a surety bond to back up the promises of the principal party.
The third-party, the surety party, is the organisation or individual that assumes responsibility for any debts the principal party does not fulfil.
Now that you understand what a surety bond is, the next thing to cover is the variety of types. Typically, there are four kinds of sureties:
- Contract Bonds
- Commercial Bonds
- Fidelity Bonds
- Court Bonds
While contract and commercial sureties are the most common kinds, employers also use fidelity bonds to protect themselves against employee-related losses resulting from dishonesty or theft. In addition, public courts use a surety bond to protect people against losses related to court case proceedings.
The answer to this question is “yes & no.” In some ways, a surety bond is a type of insurance policy because it offers protection for the obligee party. However, most insurance policies differ from these bonds because, unlike many regular insurers, the surety party usually does not pay the total amount of the claim the obligee makes. Instead, the surety simply covers the cost of recovering losses or damages.
However, the responsibility for the total amount of the claim can ultimately land with the principal party. Bond details often vary; be sure to double-check with the surety you are considering before making any decisions.
If you want to work on government contracts shortly, you will probably need a surety bond to do so. As such, anyone with an interest in providing services that government agencies frequently contract out will likely need one.
Because a surety bond is, in some ways, a type of insurance policy, you will find many insurance companies who offer them. The thing is, insurers need to have experience with these kinds of bonds. Make sure you ask questions until you feel comfortable working with a particular surety.
If you have ever heard someone talk about a surety bond, now you know what he or she was talking about. Even better, you can use this knowledge to help you open up business opportunities in the future.