Surety bonds are three-party agreements in which the issuer of the bond (the surety) joins with the second party (the principal/contractor) in providing protection to a third party (the obligee/owner) regarding fulfillment of an obligation on the part of the principal. An obligee is the party to whom a bond is given. The obligee is also the party protected by the bond against loss.
There are three primary types of contract surety bonds.
The bid bond assures that the bid has been submitted in good faith, that the contractor intends to enter the contract at the price bid and provide the required performance and payment bonds.
The performance bond protects the owner from financial loss in the event that the contractor fails to perform the contract in accordance with its terms and conditions.
The payment bond assures that the contractor will pay certain workers, subcontractors and material suppliers.