Surety Bond Vs. Cash Bond

A surety bond is a form of insurance meant to ensure the completion of any building work a constructor does. There typically are three parties to a surety bond. The contractor is the principal, the property owner is the obligee, and the surety company is the party that takes action if the contractor defaults. A cash bond is an agreement in which one party agrees to pay another party a stated amount in order to demonstrate incentive to fulfill an obligation. Cash bonds typically are used to free an individual from jail.

Surety bonds are more complex than cash bonds, as several types of surety bonds are available: a bid bond, payment bond, performance bond and ancillary bond. These often are required in connection with federal or state construction projects, and the surety company's fee is based on a percentage of the contract's value.

Bid bonds ensure that the successful bidder on a contract will obtain payment and performance bonds. Payment bonds ensure that suppliers and subcontractors are compensated for performing their contractual obligations. Performance bonds ensure that the contracts terms and provisions are carried out. Ancillary bonds cover any contract requirements not covered in the performance bonds.

With respect to criminal court, surety and cash bonds are legal agreements entered into between the court and a defendant that requires the defendant to appear before court when his case is heard. Prior to appearing in circuit court, a bond court judge sets a cash bond amount, which the defendant uses as collateral guaranteeing his later appearance. If the individual does not return to his appointed court date, the cash bond amount is forfeited. A variation of the surety bond serves the same purpose, but is backed by a bond agency and uses property as collateral.