Construction Bonds 101

Construction Bonds 101

For anyone looking to trade in the construction industry, contractor bonds are a MUST have. What’s more, if you
only assume that bonds are only necessary for substantial public projects, you are mistaken! Whether your specialty is in the public or private sector, contractor bonds are an integral part of establishing a competitive business.

To get a better understanding of construction bonds, it is essential that you initially recognize that ‘construction bonds’ and other related terms such as ‘contract bonds’ ‘statutory and defect bonds,’ or even ‘performance, payment and performance bonds’ all represent one thing.

Defining Construction Bonds:

Construction bonds are merely types of surety bonds which guarantee that contracts will not only be fulfilled but also punctually completed and as per the specifications of the contract. As such, where the contracted party fails to act on all the stipulated conditions, a project owner can subsequently make a claim on the bond to cover for the resulting financial losses incurred.  Here is how that works.


While these bonds are generally considered vital for projects funded by the government, some private project managers may also require for these bonds to be included in the overall bidding process.

Types of Construction Bonds

1. Performance Bond

This is a bond that ensures that a contractor completes a project as per the stipulated terms in a contract. In the instance where a contractor defaults on some terms in the agreement, a project owner can file a claim against the bond for compensation-funds that can be used to hire another contractor to finalize the project.

2. Bid Bond

This is a bond that ensures that only the bidders who have fulfilled all the financial requirements submit their bid applications. Where bids are retracted soon after being accepted, project managers can file claims against the bond to cover for the difference between the proposal of the retracting contractor and the second to lowest or next bid. You can consider this bond a performance and payment bond pre-qualification.

3. Maintenance Bond

This is a bond that provides security against faulty materials and workmanship for a specified time frame after the completion of a project. If either the project itself or materials are identified as defective within this period, the bond can subsequently go towards paying for replacements and repairs should the contractor fail or is unwilling to fix it.

4. Payment Bond

This is a bond that ensures streamlined payments especially in instances where contractors declare bankruptcy. The claim made against this bond can assist in compensating suppliers and subcontractors where the primary contractor is unable to pay. According to the Federal Miller Act, these bonds are mandatory on every federal-funded project, mainly where the contract is over and beyond $100,000.

Construction works are heavily regulated particularly where federal and state contracts are involved. As such, depending on the type of project you are working on, you will need to have a distinct kind of contractor bond, or rather, a construction bond.

Even a Small Contractor Needs to Have Insurance

Even a Small Contractor Needs to Have Insurance

There are potential risks in every contract and job you work on and with this in mind you need to protect yourself and your business. Above all else you need to ensure the integrity of your business and its financial assets are protected, and this is where insurance comes in. The right insurance cover can be even more vital for small contractors as the risk of a compensation claim could be enough to ruin a business. Small contractors working without insurance run the risk of losing their entire business should a claim be made against them or being significantly out of pocket to the extent that it is too expensive to keep trading.

Why do all contractors need insurance?

Insurance provides your business or the services you provider as a contractor with financial protection should the worst happen. There are many different types of insurance and some may be more relevant to your business than others. From the breakdown of essential business equipment to unhappy or dissatisfied clients, insurance is a financial protection if you find you are having unexpected issues during your work. Not all the risks a business faces can be mitigated, but those that can should be, and with insurance, lots of risks can be effectively managed.

What types of insurance do contractors need?

Small contractors may think their risks are minimal but a single claim made by an unhappy client or employee could lead to significant costs, in the form of compensation and also court costs. Each contractor is different so your individual insurance needs may differ but it is likely you will want to consider the following:

  • Total building replacement protection
  • Liability insurance
  • Property insurance
  • Business vehicle insurance
  • Crime insurance
  • Business income insurance
  • Group life insurance
  • Employment practices liability insurance
  • Workers’ compensation

There are also a large range of specialist and niche insurances which may be relevant to individual businesses and contractors. Depending on the area you practice in you may want to look more thoroughly at the options available beyond the basics. Contractor’s insurance plans are sometimes individual but they also be part of a larger business owner’s policy, depending on how you decide to approach it.

Finding the Right Insurance for your Needs

The right insurance for an individual contractor’s needs will change significantly from person to person. Some contractors may have a fleet of vehicles to consider whereas others may only have a single truck and set of tools. The beauty of insurance policies as they are flexible and tailored to your business needs so there is a solution for everyone.