Bonds are provided as useful means of creating financial security for the Employer for the Contractor’s failure to perform his contractual obligations.
Generally, a bond is an arrangement under which the performance of one party (A) to another party (B) is backed up by a third party (C). What happens is that C promises to pay B a sum of money if A fails to fulfil the relevant duties. In this context A is commonly known as the principal debtor or simply principal; B is called the beneficiary; and C is called the bondsman, surety or guarantor.
In the construction context, such back-up is likely to come from one of the two sources below:
(a) Parent Company Guarantee – the contractual performance of one company within a corporate group is underwritten by other members of the group; or
(b) Bonds – normally provided (at a price) by a financial institution such as a bank or an insurance company.