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Guide to Contract Bonds in Construction
What Is a Contract Bond?
Contract bonds are a type of surety bond that guarantees contract fulfillment. They are most commonly used in the construction industry to ensure projects are completed according to set terms. The terms “contract bond” and “construction bond” are often used interchangeably.
How Does a Construction Bond Work?
A construction or contract surety bond is a three-party agreement between a contractor, the project owner and the surety provider. If the contracted party fails to fulfill its obligations, the project developer can file a claim on the bond to recover financial losses.
How Much Does a Contract Bond Cost?
Contract bond premiums typically range between 1% to 3% of the total bond amount. These bonds require underwriting, so applicants may need to supply information verifying their ability to complete the contract, such as:
- A credit check
- Personal financial statements
- Business financial statements
- Scope of current projects
- Insurance certificate
- Number of employees
- Bank reference letter
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Types of Contract Bonds
The three primary bond types required for contractors are bid, performance and payment bonds. Certain jobs may require other construction bonds such as supply, maintenance, subdivision and site improvement bonds.
Use the links below to find more information about each type of contract surety bond:
- Bid bonds assure project developers that contractors have the credentials necessary to accept a job. If a contractor retracts their bid, the developer can collect the difference between the original bid and the next highest bid.
- Payment bonds guarantee payment for services and supplies if lead contractors go bankrupt while working on projects.
- Performance bonds guarantee that general contractors complete construction projects according to the agreed-upon terms.
- Individuals must purchase these bonds before they can receive their contractor's license to ensure they comply with professional regulations in the construction industry.
- Encroachment bonds hold contractors responsible for damage done to public property and ensure they follow all regulations on the public right of way.
- The Miller Act requires a surety bond for any federally-funded construction projects for more than $100,000. These payment and performance bonds protect public funds from losses on contracted projects.
- Maintenance bonds protect against defective materials and workmanship after a project is complete. If the project is found to be defective, the bond amount can pay for necessary repairs.
- Site improvement bonds guarantee the completion of certain renovations or improvements made to projects, properties or structures.
- Subdivision bonds require contractors to build or renovate public structures within subdivisions according to local specifications.
- Supply bonds mandate that suppliers provide materials, equipment and supplies as defined in purchase orders.
Understanding Different Construction Bond Types
What’s the Difference Between a Contract Bond and a Performance Bond?
- A performance bond is a specific type of contract surety bond that guarantees a construction project will be completed according to terms.
What’s the Difference Between a Contract Bond and a Payment Bond?
- A contract bond ensures the terms of a construction project are met from start to finish. There are various types of contract bonds required throughout a project, including bid bonds, performance bonds and payment bonds.
- Payment bonds specifically guarantee that the suppliers and subcontractors on the job will be fully compensated by the lead contractor.
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