Types Of Construction Bonds - Know Which One You'll Need For Your Next Project

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Types Of Construction Bonds

Know the necessary bonds needed for a construction project

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Bidding on a Construction Project? Know Which Bonds You’ll Need.

Almost all federal construction projects will require a contract surety bond, but often private construction projects require surety bonds as well if the project costs over a certain amount. Construction bonds, also known as contract bonds, are a type of surety bond that guarantees the payment, performance, or bid of a project. It ensures that the contract will be completed to the standards specified in the initial agreement when the bid is won. This means deadlines will be met, materials and workers will be paid, and the actual construction work will be completed following all laws, regulations, and standards. The 3 most common types of construction bonds are Bid Bonds, Performance Bonds, and Payment Bonds. Other construction bonds that are often required include Maintenance Bonds, Supply Bonds, Subdivision Bonds, and Site Improvement Bonds. Depending on your role in the construction project, you may be required to obtain one of these construction bonds. Know the difference between each and contact your national surety agency to help you get the best rate for your required construction bond.

Types of Construction Bonds Infographic

What is a Construction Bond?

Construction bonds are a type of surety bond that investors require of contractors on a construction project. Construction bonds protect investors from financial loss or disruptions that cause a project to take longer than expected due to a contractor’s failure to complete the tasks to specification as agreed to in the original contract. This type of surety bond is essentially another form of insurance for project owners and investors. 

Bid Bonds Help Solidify Your Bid On A Project

A bid bond is a type of contract or construction bond. A bid bond offers a guarantee that when you submit a bid for a project that you are submitting an accurate bid and will later post a performance bond and/or payment bond as well. Bid bonds are generally used on public construction jobs and are considered financial security for contract bid proposals. An established surety agency can help you get the bid bond necessary to help you win the bid and move forward with construction. Even as a small business owner, Bonding Solutions can help you get a bid bond large enough to compete with your top competitors who may be more established. We partner with the SBA to help provide small businesses the same opportunity to win bids on large projects that will ultimately help their business grow. 

Payment Bonds Ensure The Payment of All Appropriate Parties

Payment Bonds are generally used on construction projects in conjunction with a Performance Bond, but can also be obtained as a stand-alone bond. The Payment Bond guarantees that all suppliers, subcontractors, and laborers used on a specific contract will be paid by the contractor and that the project owner will not have a lien placed on the project. Some non-construction projects require payment bonds as well. Payment bonds are crucial as they ensure that all appropriate parties will be paid in full and on time during the entirety of the construction project. If a contractor fails to pay laborers, suppliers, or subcontractors, the owner of the project can make a claim against the contractor on the Payment Bond in order to pay all parties. This type of construction bond ensures that the project owner will not have any personal financial loss if the contractor fails to pay all parties. Instead, the surety will pay the appropriate fees and then the contractor will be required to pay back the surety. 

Performance Bonds 

A Performance Bond is issued to guarantee the performance on an obligation under a contract or other construction agreement. The bond is usually paired with a Payment Bond and is common in the construction industry. A performance bond guarantees that contractors will complete the job according to the specification as stated in the initial contract, and in accordance with the proposed schedule. If the contractor fails to perform all duties according to the contract, a claim can be made against the performance bond. When a claim is made against a performance bond, it ensures that investors will not experience any financial loss on behalf of the contractor’s failure to complete the project according to the initial contract guidelines. 

Maintenance Bonds

A maintenance bond is a type of construction bond, also known as a warranty bond, that guarantees all work completed on a project will be free from defects in terms of workmanship and materials. This bond runs for a specified period of time after a construction project has been completed. If any defects are found or occur during this period of time, a claim can be made against the bond in order to pay for damage and repairs. This is a popular type of construction bond as it is an added form of insurance once the project has been completed. Investors can have peace of mind knowing that any defects or issues with workmanship and materials will be covered under the bond policy.

Supply Bonds Ensure All Materials Will Be Provided According To The Contract Agreement

A supply bond is a type of construction bond. The supply bond ensures contractors will provide the supplies and materials specified in the initial contract. The supply bond is necessary in order to obtain supplies and materials for new or renovation construction projects. Construction bonds hold all parties accountable for their part in completing a construction project. From contractors to suppliers, each individual party will most likely be required to obtain some type of contract bond to ensure the project is completed according to the initial project scope and agreement. A supply bond ensures that all supplies and materials will be provided, paid for, and utilized accordingly.

Subdivision Bonds

Subdivision Bonds, also known as Subdivision Development bonds, are required by local and state governments for any contractors who are improving or constructing public projects, including utilities, sidewalks, etc. This type of construction bond ensures the contractor delivers and meets all required specifications set forth by the municipality. This type of contract bond is often required not only for the municipality but also for the safety of the public. Subdivision Bonds ensure that the contractor will complete the task according to all laws and regulations within that municipality.

Site Improvement Bonds

A Site Improvement Bond, required by local, state, or federal municipalities, is a type of construction bond that is required to assure the completion of a project’s site improvements as approved by the municipality’s engineers. There are several different names and types for site improvement bonds. Off-site or Right of Way bonds guarantee that utility, paving, curbing, sewer, and other improvements that are in the public right of way or that connect to the public right of ways will be completed. On-site improvement bondssubdivision, or development bonds offer a guarantee that public site improvements such as lighting, sewer, paving, etc will be completed. Site improvement bonds protect the municipality, homeowners, and public tax dollars against the developer or contractor’s failure to complete the project according to the contract, laws, and regulations.

Why Are Construction Bonds Required

Construction bonds are required for the following reasons:

  • To protect investors from financial loss
  • To protect subcontractors, laborers, and suppliers from financial loss
  • To protect the general public – construction bonds guarantee the performance, maintenance, and workmanship of contractors and ensure that everything will be done according to all laws, regulations, and standards for the safety of the general public
  • To ensure that all projects are completed according to the signed contracts

Who are the 3 Parties Involved in a Construction Bond?

The Principal:

This is the person required to obtain the surety bond. The principal will adhere to all laws and regulations in accordance with the surety bond. In regards to a construction bond, a contractor is usually the principal required to obtain the surety bond.

The Obligee:

This is the person or party who is the recipient of the obligation. This means that if the principal fails to comply with the surety bond requirements and regulations, the obligee can make a claim against the surety bond, or in this situation, make a claim against the construction bond. In this case, the obligee would be the project owner or investor.

The Surety:

This is the party that assures the obligee that the principal can in fact perform the tasks associated with the surety bond. The surety guarantees the performance or obligations of the principal, and if the principal fails to meet said obligations, the surety will provide the appropriate compensation to the obligee which will eventually be repaid by the principal.

Types Of Construction Bonds – Knowing The Difference Between Each and Understanding Which One You Need

Depending on your role in the construction project, you may be required to obtain a construction bond. Obtaining a construction bond is easy when you work with a national surety agency that has the ability to write any bond in any state. Bonding Solutions can help you get the correct construction bond for your next project. Construction bonds are often required but the process to obtain one can be intimidating if you are a new business. Bonding Solutions has tailored bonding services to help each of our clients get the right bond at the best rate, established or brand new. Contact our team today to learn more about our construction bond options.

Type of Construction Bonds Infographic

 

published on Monday, October 26th, 2020

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