Construction
Bonds
What are they for?
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What is construction bond?
Construction bonds are also termed as contract
bonds and can be considered as a promise to
fulfill the obligation of payment according to the
terms of a contract.
They are a form of financial guarantee that the
bills coming out of a construction project will get
paid.
How does a construction bond work?
Key Points
Construction bonds, also known as surety bond, are required for
most public works construction projects. A contractor bidding for
a public construction job is generally required to submit a
contract bond or construction bond to be able to get a
government contract. Very large private/commercial construction
jobs sometimes require bonds in their proposals also.
The construction bond offers an assurance to the project owner
that the general contractor will be completing the work to the
conditions stated in the agreement. Construction bonds may
come in two parts on larger projects: the first one to protect
against overall job incompletion, and the other to protect against
nonpayment of materials and labor from suppliers and
subcontractors.
Parties involved in a construction
bond
1
2
3
The investor/project owners, also known as the obligee.
The general or prime contractor in charge of building the
project.
The surety company that backs the project.
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The project owner or the investor is generally a government agency that hires a
general contractor to perform a construction job. To lessen the chances of financial
loss, the project owner requires all bidding general contractors to secure a bond for
that specific project.
By submitting a construction bond for that project, the general contractors promise
they will be completing the job according to the contract. Also the general
contractors agree that not only they will be providing financial and quality assurance
to the project owner, but also the project will be carried out to the highest quality
specified in the agreement.
The contractor purchases a construction bond from a surety which runs extensive
background and financial checks on the contractor before approving a bond.
Requirements of the Construction Bond
The companies who get construction bonds are subject to the
following:
● Review of the contract requirements to see if a construction or
contract bond is needed.
● Getting a bid bond from the surety agent and submitting it
with the proposal.
● If awarded a contract, approaching the agent for a
performance bond.
● Completing the job.
● Getting a maintenance bond, if required, once the job is
completed to do any repairs.
● Most government jobs require the use of a construction bond.
However, there are some lines of work that don't qualify for
construction bonds from American companies even when the
job may be posted by the government.
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