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Surety Bonds

Simply put, a surety bond is a contract between three parties (principal, surety, and obligee) to financially guarantee that the principle will fulfill the bonded contractual obligation to the obligee.

So, what does this all mean? The penal sum of the bond is just a figure that matches the initial contract value. It ties the bond to the contract via a shared contract value, but that is not it when it becomes the surety’s total obligation.

What if the contract value changes, the contract terms change, or the principal’s obligation changes as a result of a change order or contract modification?

The surety is now required to guarantee that the principal will fulfill the “new” contract version. This is something to keep in mind while evaluating supplied bond forms in bid specs or a contract. Many contracts contain a clause that states that “the obligee may have the right, without notice to the surety, to change terms in the contract, performance expectations, time requirements, modify the order, extend obligations, or change the contract in any way, but this will not affect the surety’s obligations on the bonds.” Normally, one would suppose that this indicates that the penal sum of the bonds will remain the same, but it actually means that the new provisions of the contract will become the obligation of the surety.

Because bonds are issued in accordance with the contract, the new obligation may be whatever the new performance standards are, independent of the penal sum. Before both you and the surety are bound by them, make sure to study your bond forms and any contractual duties linked to the surety requirements.

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Dillon Rosenhamer
Dillon Rosenhamer

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