Benefits of Surety Bonds

Benefits of Surety Bonds

Surety bonds are financial instruments that play a critical role in a variety of industries by ensuring contractual obligations are met. They involve a three-party agreement among the obligee (the party requiring the bond), the principal (the party required to perform a contractual obligation), and the surety (the party guaranteeing the principal’s performance).

If the principal fails to fulfill their duties, the surety steps in to compensate the obligee, providing a safety net that mitigates risks associated with non-performance or default. Commonly used in construction, business licensing, and legal matters, surety bonds help maintain trust and financial stability within these fields.

Here at Pacific Union, we offer a wide range of surety bonds that will be a help for you and your business.


To first know about surety bonds, the first thing to note is that there are two main types: judicial and non-judicial. Judicial bonds refer to the class of bonds that are posted in compliance with a court order, the Rules of Court, or statute. On the other hand, non-judicial bonds refer to the class of bonds that are posted in compliance with a private contract. 

For this article, we’d like to focus on a contractor’s bond whose main undertaking is to guarantee the performance of an obligation of contractors engaged in any of the following fields: 

  • Construction
  • Supply and Delivery
  • Services

Here, then, are the commonly issued contractor’s bonds. 

Bidder’s Bond

Undertakes to guarantee that the successful bidder, within a specified period from the date of receipt of the Notice of Award, shall

  1. Enter into a contract with the Obligee
  2. Furnish a performance bond for the faithful and complete prosecution of the work specified in the contract. 

This surety bond’s primary function is to answer for the cost of conducting another bidding and answer the cost of the difference between the winning bid and the next lowest complying bid.

Downpayment Bond

Next up are downpayment bonds which guarantee the recoupment or repayment of the advance payment granted to the Principal through deductions from progress billings submitted by the contractor for his periodic accomplishments. Usually, it is 15 percent of the Total Contract Price or 100 percent of the downpayment.

Ultimately, its function is to reimburse the Obligee for the cost of the un-liquidated advance payment at the time of rescission of the Principal Contract. 

Performance Bond

This bond ensures the construction and completion of a project in accordance with the approved plans, specifications, and terms and conditions of the contract. It may also guarantee the principal’s obligations under a supply and delivery and/or installation contract with respect to equipment, materials, supplies, and similar items. It is also usually 10 – 30 percent of the Total Contract Price. 

A performance bond’s liability as well is pay for the additional cost to complete the project. The additional cost of completion is equivalent to the difference between the contract cost to complete the project under the new contractor and the cost of completing the project under the old contractor. 

Retention Bond

A bond that replaces the retention money that is typically withheld from the contractor’s payments, and secured during the construction phase, to ensure they complete the project and fix any defects during the defect liability period.

Warranty Bond

Finally, a warranty or guaranty bond ensures the correction and repair of hidden defects in the materials and workmanship used by the Principal in the project found or becoming evident within one year from: 

  1. The date of final acceptance of the project, or
  2. Within one (1) year or other prescribed period from the date of final and substantial completion or provisional acceptance of the project. 

To know even more about surety bonds, feel free to contact us today at our website, email, landline, or any of our social media platforms.