Final answer:
A surety bond is a financial guarantee from a bonding company that ensures a project owner is protected if a contractor does not fulfill a contract. It acts like insurance for project completion, payment to subcontractors, and compliance with a bid. Surety bonds are commonly used in construction and for public and court-mandated projects.
Step-by-step explanation:
A surety bond is a financial guarantee by a bonding company that covers the owner of a project against losses if the contractor fails to fulfill the terms of a contract. This serves as a form of insurance policy where the surety bond provider, also known as the guarantor, assures the project owner, known as the obligee, that the contractor, the principal, will perform the contractual obligations.
There are different types of surety bonds, including performance bonds, which ensure the completion of a project; payment bonds, which guarantee that subcontractors and suppliers will be paid; and bid bonds, which provide a guarantee that a contractor enters into a contract if selected during the bidding process. Surety bonds are commonly used in the construction industry but can also be required for various public jobs or by the court.