There are dozens of different types of bonds which are divided into two different categories: contract bonds and commercial bonds.

CONTRACT BONDS: When any government or large company hires a contractor, they will usually require that the contractor secure a bond. The bond is the contractor’s guarantee to the obligee that he will perform as promised. If the contractor (the principal) should fail to perform, the surety company will pay out damages to the obligee. The surety company will then recover the amount of the claim from the contractor plus costs.

BID BOND: A bid bond may be required of a contractor in order to submit a bid for a project. The bid bond protects the obligee in the event that the winning contractor is unable to take the job after securing the bid reimburses them the difference between the principal’s bid and the next lowest bidder.

If the contractor has the winning bid, the bid bond will convert into a Performance Bond which guarantees that the job will be completed.

COMMERCIAL BONDS: Any bond that is not a contract bond is known as a commercial bond. These include but are not limited to fidelity bonds, business service bonds, and bonds required by governments to secure business licenses.