Answers to 32 Questions Public and Private Owners Ask About Contract Bonding
Published by National Association of Surety Bond Producers (NASBP), SuretyLearn.org. Jurisdiction US.
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A surety bond is a promise to be liable for the debt, default, or failure of another, and is a three-party contract by which one party, the surety, guarantees the performance of a second party, the principal, to a third party, the obligee.
claim nasbp-32-questions-contract-bonding#c1The surety is an insurance company licensed by a state department of insurance to provide surety bonds to guarantee the performance of a principal.
claim nasbp-32-questions-contract-bonding#c2The obligee is the entity with whom the principal has a contract and to whom the bond is given; in construction this is the project owner or the prime contractor.
claim nasbp-32-questions-contract-bonding#c3If the owner is the bond obligee, then the prime contractor is the principal; if the prime contractor is the obligee, then the subcontractor is the principal.
claim nasbp-32-questions-contract-bonding#c4Surety bonds are almost always written by insurance companies that are licensed by state insurance departments, but they are not like traditional insurance policies: surety bonds are three-party agreements and traditional insurance policies, such as life insurance or property insurance policies, are two-party agreements.
claim nasbp-32-questions-contract-bonding#c5The surety does not assume the primary obligation but is secondarily liable if the principal defaults on its bonded obligation.
claim nasbp-32-questions-contract-bonding#c6A surety does not expect to suffer losses because the surety expects the bonded principal to perform its contractual obligations and because the surety has a signed indemnity agreement from the contractor to protect the surety from any losses the surety suffers as a result of having issued bonds.
claim nasbp-32-questions-contract-bonding#c7A general agreement of indemnity is a contract between a surety company and a contractor that obligates the contractor and other indemnitors to protect the surety company from any loss or expense that the surety has as a result of having issued bonds on behalf of the bond principal, and if the contractor fails to fulfill its bonded obligation and the surety suffers any loss, the indemnitors are legally bound to indemnify, or pay back, the surety for its losses.
claim nasbp-32-questions-contract-bonding#c8A fundamental concept of suretyship is that the surety will not sustain a loss; the surety expects to be indemnified and reimbursed for any payments or losses by the principal and indemnitors under the indemnity agreement, so the general agreement of indemnity is needed before the surety issues any bonds and applies to all bonds issued by the surety for the principal.
claim nasbp-32-questions-contract-bonding#c9A surety company that issues bonds on behalf of a contractor almost always requires that the principal, the individuals who own or control the company, their spouses, and often affiliated companies sign the general agreement of indemnity.
claim nasbp-32-questions-contract-bonding#c10Obtaining bonds is more like obtaining bank credit than purchasing insurance, and almost all sureties consider financial capacity, net worth, cash flow, assets, credit score, work in progress, work history including expertise and experience, banking relationship, nature of the project to be bonded, and character of the contractor.
claim nasbp-32-questions-contract-bonding#c11The main types of contract surety bonds are bid bonds, performance bonds, payment bonds, and warranty bonds, sometimes called maintenance bonds.
claim nasbp-32-questions-contract-bonding#c12Under a bid bond, the surety's liability is generally limited to the face amount, or penal sum, of the bond, which is typically in the range of 5 to 20 percent of the contract bid price.
claim nasbp-32-questions-contract-bonding#c13The cost of a bond is based on rates filed by insurance companies with the state insurance department and is based on the contract amount; it can vary from less than 0.5 percent to as much as 3 percent of the contract price, and for a small and emerging contractor with minimal experience a contractor can expect to pay 2 to 3 percent of the contract price.
claim nasbp-32-questions-contract-bonding#c14Bonds must be paid when they are executed, and bonds are non-cancelable.
claim nasbp-32-questions-contract-bonding#c15
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Reviewer notes
Downloaded 2026-08-31 and extracted with pdftotext, then read the relevant question and answer blocks directly. This is a trade association publication and is labeled secondary. It is used for the three-party structure, the credit-versus-insurance contrast, the general agreement of indemnity, bid bond penal sums, and pricing practice. Statutory and regulatory points rest on primary sources instead. The document's penal sum statements are specific to bid bonds and to dual obligee savings clauses; no general penal sum rule is claimed from it here.