Construction Bonds, also known as "contract bonds,” can be used for many reasons; however, they are most commonly used in the construction industry to ensure projects are completed according to contract – one of the reasons the two terms are used interchangeably. Construction bonds guarantee that contracts are fulfilled; in the instance that a contracted party fails to fulfill its duties according to the bond's terms, the project developer is entitled to make a claim on the bond to recover financial losses. Surety bonds are almost always required before work can begin on public projects — especially those that are federally funded — but private project developers can also require contractors to file certain types of surety insurance before starting any work.
These bonds cover a variety of construction types including:
Bid bonds insure that contractors submit serious proposals for projects, and reassure project developers that bidders are financial able to accept the job. In the instance that a bid is selected and the contractor declines the job or retracts the bid, a claim can be made on the bond and the project developer will recoup the difference between that bid and the next-highest bid.
Performance bonds guarantee that projects are completed in accordance with contractual terms. Failure to do so can result in the project developer making a claim on the bond in order to access funds to pay a second contractor to complete the job. Under the federal Miller Act, all federally funded projects worth $100,000 or more require performance bonds.
In the instance that contractors go bankrupt while working on projects, payment bonds guarantee proper payment for services rendered and can be used to reimburse suppliers, subcontractors, and others who worked on a project. Under the federal Miller Act all federally funded projects worth $100,000 or more require performance bonds. These bonds are issued more frequently in conjunction with performance bonds.
Supply bonds mandate that suppliers provide materials, equipment and/or supplies as called for in purchase orders. Failure to provide the supplies as agreed results in the bond amount being used to reimburse the purchaser for the losses.
Maintenance bonds guarantee against defective materials and workmanship for an allocated time period after a project's completion. If the project is found to be defective during this time, the bond amount can be used to pay for repairs.
Subdivision bondsrequire contractors to build and/or renovate public structures within subdivisions including: streets, sidewalks and waste management systems — in accordance with local specifications. Failure to do so can result in the bond amount being used to complete the subdivision project appropriately.
Site Improvement Bond
Site Improvement bonds guarantee the completion of improvements made to projects. These are generally used for renovation projects that update older structures and/or other existing properties.
Contractor License Bond
Contractor license bonds are often mistakenly grouped in with contract bonds for their similar use by construction professionals. These bonds must be purchased preempting the receipt of licenses at the state, county and/or city level. Contractor license bonds ensure all applicable licensing laws and regulations are followed.