A project owner points at a tablet while speaking with a construction worker at a construction site.

Construction projects of any size can be risky endeavors. Construction surety bonds provide the most comprehensive risk management tool available to protect construction projects against default and ensure contractual obligations are met.

What is a construction bond?

Construction bonds, which are also known as contract bonds, provide project owners a guarantee that contractors will adhere to the construction contract. Construction bonds cover the quality of the work performed as well as payment of material suppliers, specified subcontractors and other laborers.

Construction bonds involve three parties.

  • The project owner is known as the obligee
  • The contractor is known as the principal.
  • The surety company, or surety, is the guarantor of the underlying bond guarantee.

How does a construction bond work?

Contractors are required to secure and file construction bonds before bidding or performing work on a construction project for government-funded or public works projects. In addition, general contractors can require subcontractors to provide bonds, as well.  Private owners can also require bonds to guarantee performance for private construction, supply and service-type contracts. The benefit to the public is obvious as taxpayer funds, protected through performance and payment bonds, deliver public infrastructure projects from schools to streets and bridges that build communities and support economies.

There are different kinds of contract bonds available to meet the unique needs of a range of projects. Most contract bonds protect the project owner in the event the principal doesn’t perform the work outlined in the contract, doesn’t pay for labor or materials, delays completion, provides defective workmanship, or doesn’t adhere to laws and other regulations.

If the contractor doesn’t uphold its part of the agreement, the contractor and the surety are held financially liable.

Surety and Fidelity Association of America  commissioned an Ernst and Young study that found that construction projects protected by surety bonds have  lower contractor default rates, lower cost of completion in the case of default and are finished more quickly than projects that are not bonded. The overall value of surety bonds more than covers their cost for a standard portfolio of construction projects.1

Construction bond timeline

The bond underwriting process involves a thorough review of the contractor’s qualifications to ensure they have the experience, character, credit quality, capacity and resources to complete the work outlined in the contract.

Surety companies also complete an exhaustive review of the contractor’s financial statements. This includes evaluating financial statements and income tax returns. The process of vetting a contractor may take  significant time to complete, so it’s best to plan ahead to be ready for that first bid bond.

The terms and duration of contract bonds vary depending on the language of the contract, so it’s important to work with a surety professional to ensure you understand the scope and length of coverage an individual bond is in effect. Bonds of this type cannot be cancelled, but instead are released by the owner when the work is fully completed and labor and material suppliers are paid.

Types of construction bonds

There are different construction bonds available for a variety of projects.2 Some of the most common ones include:

  • Bid bonds, which guarantee that a contractor will perform the work at the agreed upon price if they are awarded the contract.
  • Performance bonds, which guarantee the contractor will perform the work in accordance with the contract.
  • Payment bonds, which guarantee that the contractor will pay for labor and materials in association with the contract.
  • Maintenance bonds, or warranty bonds, which protect project owners for a defined period in the event of faulty materials or workmanship on the construction project.

Who pays for a construction bond?

Typically, the contractor, or principal, is responsible for securing and paying for the construction bond. The cost of underwriting and establishing a line of bond support to a contractor is covered by the surety carrier. If the principal never needs a final bond, the costs incurred by the surety are not recovered.

How to get a construction bond

Often, bid deadlines can put pressure on a contractor to gather labor and material estimates, determine capacity and importantly, obtain a bid bond. This highlights the importance of prequalifying for a surety line of bonding prior to needing a bid or final bond for a construction project, or supply or service contract.

While each surety is different, the underwiting process typically involves review of business and personal credit, financial information, and experience, which takes time.

For smaller lines of surety credit, carriers often consider only personal credit, so the process can be expedited. Personal and business indemnity is typically required, meaning the applicant may pledge personal and business assets along with other terms to qualify. Often, indemnity must be obtained before a bond can be delivered.

The contractor should review the requirements for the bid to determine what kind of bond is necessary. A bid bond can be required for a flat amount or for a percentage of the amount bid. If the contractor fails to enter in to the final contract at the price bid, this may result in a bid bond claim.

If the contractor provides the lowest acceptable bid, a performance bond guarantees the construction contract. After the job is complete, sometimes the contractor may also need to secure a maintenance bond to protect the project owner in the event there is an issue with the quality of workmanship and materials after construction has ended.

By working with a surety professional when securing a construction bond, you will have a trusted advisor to confirm you are securing the right bonds for the specific needs of a project.

Construction bonds provide financial protection for project owners for the duration of the project, from bidding to construction and beyond. Experienced surety professionals can guide contractors through the bonding process to ensure they secure the protection they need to comply with the requirements of the job and to help ensure the project is a success.

Learn more about Nationwide’s Contract and Construction bonds.

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[1] “The Value of Bonding,” https://surety.org/suretyprotects/ (accessed October 2024).

[2] “Contract Bond Types,” https://www.nationwide.com/business/insurance/bonds/pages/contract (accessed August 2024).

The information included here is designed for informational purposes only. Nationwide does not guarantee the accuracy or timeliness of the information contained herein. It is not legal, tax, financial or any other sort of advice, nor is it a substitute for such advice. The information may not apply to the reader’s specific situation. It is the reader’s responsibility to comply with any applicable local, state or federal regulations. Nationwide Mutual Insurance Company, its affiliates and their employees make no warranties about the information nor guarantee of results, and they assume no liability in connection with the information provided.