Construction · Insurance Term
Surety Bond
Definition
A surety bond is a three-party guarantee: a surety company promises a project owner or agency that a contractor or business will keep its obligations. If the contractor fails, the surety pays or fixes the problem, then seeks repayment from the contractor. It is not insurance for the contractor.
In Plain English
The three parties are the principal (the contractor who must perform), the obligee (the owner or agency protected) and the surety (who backs the promise). Unlike insurance, the surety expects to be repaid by the principal for any loss, usually under an indemnity agreement the contractor signs.
Developers mostly meet two types. A performance bond protects you if the contractor does not finish the work as agreed. A payment bond protects subcontractors and suppliers who are not paid, which helps keep liens off your property.
A surety reviews the contractor's finances, experience and backlog before issuing a bond. Requiring bonds on a private project is a business decision between you, your lender and your contractor.
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Example
Hypothetical: you hire a general contractor for a $3 million retail building with a performance bond. Halfway through, the contractor goes out of business. The surety may hire a replacement contractor or pay costs to finish, up to the bond amount, then pursue the original contractor for repayment.
Why It Matters for Texas Property Owners
For Texas public work contracts, the Government Code requires a performance bond on contracts over $100,000 and a payment bond on contracts over $25,000 ($50,000 for municipalities and certain joint boards). Private projects have no such statutory requirement, though lenders often ask for bonds.
What to Watch For
- Confirm the bond amount matches the full contract price.
- Check that you, and your lender if required, are named as obligees.
- Verify the surety is licensed in Texas before relying on the bond.
- Ask whether you need both a performance bond and a payment bond.
Sources
Last updated October 14, 2026 · Primesure editorial team · How We Write