Understanding the 4 Types of Contractor Bonds

Understanding the 4 Types of Contractor Bonds

Construction/contractor bond

This is a surety bond that is used for protection against any financial loss or disruption that can result from contractor’s failure to meet the set specifications of a contract or to complete the project. The bonds are normally used by investors.

The contractor bond is to give the surety that the contractor will perform all tasks according to the stated terms in the agreement. Sometimes the bonds come in two parts especially in larger projects: for protection against failure to pay supplied materials and labor and for protection against overall in completion of the project.

There are several types of contractor bonds but we shall discuss the major four of these for deeper understanding.

  1. Performance bond

This is the bond which acts as your financial guarantee for completion of the construction project. It guarantees you the completion of the awarded project by the contractor without any failure and in accordance to the agreed terms.  In any case the contractor is unable to complete the project for the reasons best known to him/her, you can cash in the performance bond to recover from any loss that the contractor is responsible for.

Factors determining the cost of a performance bond include;

  • Size and contract type
  • Overall bond and amount
  • Surety Company of choice
  • Agent fees and brokers services
  • Contractor’s history & credit
  • Bid bonds

It involves three parties: the principal/proposed contractor, the obligee who is the developer and the surety which is the agency issuing the principal with the bid bond. The bond usually helps prevent contractors from submission of frivolous or inappropriately low bids in order to win contracts.

The bond is a guarantee that any contractor that wins the bid honors its terms once he/she has signed the contract. In any case he/she go against the set terms, you may break the contract if you desire to and get another contractor for that project.

Cost of a bid bond premium payable by the contractor is based on certain factors which include;

  • The bid cost (cost of the project)
  • Contractor’s financial history
  • Location of the project
  • The owner

Bid bond premiums for the larger projects in normally based on a percentage of the total cost of the project and the bid bonds penal sum.

  1. Payment bond

This bond is normally issued along with a performance bond. It is a contract between the contractor, you (owner) and the surety ensuring all laborers, subcontractors and suppliers will fully be paid. In any case the contractor fails to honor the payment specified terms, the surety pays the damages to all the demanding parties.

The payment bond is normally purchased during the bidding process then submitted to you after awarding of the project.

  1. Maintenance bond

This surety bond is purchased by the contractor in order to protect you as the owner of the completed project for a certain specified duration against all defects and faults in workmanship, materials and design that is likely to arise in case the project was not handled professionally.

A maintenance bond is a three-way contract between you the owner, the contractor and the surety to give you an assurance that the contractor will perform his/her tasks as required. In case he/she fails to fulfill obligations as agreed, the surety is to ensure that you are compensated fully.

 

Continue Reading