Construction Contract Bonds Basics

As the owner of a building under construction, you must be aware of the work, the undertaking of the job, and have confidence that the contractor will be able to finish on time and within budget. Although no one can predict issues that arise and incidents that hold up the schedule, construction contract bonds are there to help. These bonds are issued to the contractor by a corporate surety to provide peace of mind to the building owner.

Before hiring the first contractor that you see online, it is important to ensure that they are capable of doing the job correctly. A successful contractor must have the ‘three Cs’:

  • Character: The contractor should be honest and possess a high degree of integrity.
  • Capacity: The contractor must have the experience and knowledge to complete the job.
  • Capital: The contractor must have access to appropriate amounts of capital to fully fund the project.

The five most common bonds used to secure construction projects are as follows:

  • Bid or Proposal Bonds: A contractor submits a big bond along with the bid on a particular job. This bond then guarantees that the contractor will sign the contract if awarded with the project. The contractor also agrees to furnish all necessary performance and payment bonds.
  • Performance Bonds: This type of bond guarantees that a project will be completed to contract specifications and lien-free if the principal pays the contractor. Therefore, the owner must have enough immediate money to complete the job.
  • Payment Bonds: A payment bond is for the benefit of those supplying labor or materials to a particular construction project. It agrees to compensate the owner for losses because the principle does not pay the suppliers.
  • Maintenance Bonds: Sometimes, a contractor must agree to fix any defects in the workmanship for a period once the project is complete. A maintenance bond guarantees to the project owner that the contractor will meet this obligation.

Completion Bond: Often, a lender who loans out money to a contractor to complete a construction project will require a completion bond. This bond assures the lender of the projects that the job will be carried out without any liens against the property.