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.