Types of Contract Bond In Construction

May 24, 2016

Contractor License Bond: Purchasing a contractor license bond is almost always a requirement of contractors before they are licensed to work on construction projects. Depending on the laws within the state, county, city or even subdivision a contractor license bond could be required. Without the necessary contractor license bond in place the contractors often cannot obtain the license that is needed to provide construction services.

If work is performed and a contractor does not have a contractor license bond or it has expired they will feel the impact in the form of penalties, fines, licenses being revoked and even legal action. Contractors are wise not to perform any construction work until they have their contract license bond in place. The expense of not having this in place could sink a contractor before they even have the chance to get their business started.

Bid Bond: Construction projects do not all require bid bonds. They are often asked for by project owners when a contractor is bidding out a project. Financial proposals are submitted to project owners to provide a cost basis for the project. Before a contract is entered the bid and contract terms need to be agreed upon. Many project owners will not award the construction contract to contractors that fail to have a bid bond accompanying the contract.

A bid bond guarantees a contractor is entering into a contract for the amount of the original bid if the contract is awarded to them. Surety bonds ensure contracts are filled to the terms of the contract that is entered into. If a contract is awarded the surety bid bond guarantees the contractor will fulfill the contract at the amount originally billed.

Payment Bond: Any contractor seeking contracts that exceed one hundred thousand dollars are required under the Federal Miller Act to provide project owners with both a payment and performance bond. This includes any publicly funded projects when they include alterations or repairs to buildings that cost over one hundred thousand dollars as well.

A payment bond is a bond that ensures a contractor will cover the cost of materials and the payroll of sub-contractors. The payment bond keeps the project owner from being liable from any costs if the contractor cannot pay. The payment bond puts the ultimate liability on the surety company issuing the payment bond.

Performance Bond: Performance bonds are often paired with payment bonds as both protect project owners from loss sustained by contractors failing to meet their obligations. The performance bond offers a certainty to project owners that the project will be completed at the level of performance that is stated within the contract the contractor and the project owner agree upon.

Contract bonds are a type of surety bond that contractors are issued by surety companies to guarantee project owners are covered from any inadequacy on the contractor’s part. Each type of surety has criteria that must be met before a contractor’s eligibility can be determined for construction bonds. Criteria such as the contractor’s skill level, resources, ability to perform and historical criteria have been met. Surety companies analyze the applicants, contractors, overall financial status, work history, standings in financing and credit report before the surety bonds can be issued.

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