Tag: types of bonds

What are the Different Types of Contractor Bonds

What are the Different Types of Contractor Bonds?

Do you work in the construction industry or have a client in the construction industry? Have you heard the term bonds or contractor bonds? If you don’t know what contractor bond is, worry not. Contractor bond is an assurance to the obligee that he/ she will perform as promised. If the contractor fails to perform, then the surety company (issuer of bond) will pay damages to the obligee (project owner). The amount of claim plus the cost is then recovered from the contractor by the surety company. This’s exactly how bonding works. When the contractor is hired, it’s always required that a bond is secured. The contract bonds assist in regulating the construction industry.

The following are the major contact bonds used.

Bid bonds

This bond protects the project owner by assuring that the contractor will honor the original bid amount when entering the contract. The obligee can sue the contractor and the issuer of the bond (surety) to implement the bond. Frequently, bid bonds are normally presented with other financial proposals to the project owners. Also, note that not all projects require bid bonds.

Performance bonds

This is a bond that assures that the contractor concludes the job according to terms of the construction contract. In short, this bond ensures that the project is completed satisfactorily as outlined in the contract. It protects the obligee from contractor’s poor quality work or failure to complete the project. If the contractor leaves the job incomplete or completes poorly, or past the deadline, then the surety may be liable to complete the job, or contract a replacement contractor, or compensate the project owner for completing the project.

It’s normally attached with payment bond as both protect the obligee from suffering losses due to faults of the contractor.

Payment bonds

It ensures that suppliers and subcontractors are properly paid for their input to a project. If the suppliers and subcontractors fail to get their dues, then they are reimbursed by the surety who will, later on, be reimbursed by the contractor.

Contract license bonds

This bond enables the contractor to be licensed for a project. The contractor has to purchase this bond in order to be qualified for a project. The contractors will always face consequences if they try to work on projects without a contract license bond or if they use an expired one. Repercussions may include weighty fines and license revocation.

For many construction companies, qualifying for contract bond can always be an annoying part of the business. Getting to know the different types of contract bonds and understanding how they work enable contractors to appreciate bonding process. It’s imperative to consult before entering into a contract bond.