Construction bonds play an important role in protecting project owners, investors and public funds. Here, we’ll take a closer look at the different types of construction bonds that are available.
What is a construction bond?
Construction bonds are financial guarantees that a contractor will follow and successfully complete the specific terms of a construction project. They are a type of surety bond that protects the project owner from financial loss in the event the contractor fails to successfully complete the job on time as well as pay suppliers and subcontractors, as promised. Construction bonds are sometimes called performance and payment bonds, or contract bonds.
Types of construction bonds
Different types of construction bonds offer protection during different phases of a construction project, from bidding through contract completion and beyond.
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Bid bonds
Bid bonds, which are submitted by a contractor during the bidding process, offer a guarantee to the project owner that the successful low bidder will enter into the contract at the agreed-upon bid amount.
A project owner can require bid bonds from a surety on a flat amount or percentage of bid form. If the contractor refuses to enter into the contract at the price bid, a bid bond claim could arise. Only bids that conform to the bidding process are considered, and bid times and dates are strictly adhered to.
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Performance bonds
Once a project has been awarded to a contractor, the contractor secures a performance bond from a surety. Performance bonds, which are sometimes called contract bonds, provide project owners a guarantee that the contractor will complete the work according to the terms of the contract.
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Payment bonds
In contrast to performance bonds, payment bonds provide a guarantee that the contractor will pay material suppliers, workers and subcontractors according to the contract.
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Maintenance bonds
After a construction project is complete and accepted by the owner, maintenance bonds provide financial protection should construction defects arise during the maintenance period. Maintenance bonds required at the completion of a construction project can cover a range of faults, including design, workmanship and material defects.
Maintenance bonds are typically required for a limited time, and any defects or faults found after the warranty period are not covered by the bond.
Construction bonds provide project owners, investors and those entrusted to protect public funds with peace of mind as they embark on construction projects, big or small.
As a construction professional, start early to partner with your surety agent and bond underwriter. Work with a surety professional to ensure you’re selecting the right bond underwriter for your unique needs to maximize profit and sustain the health of your business.