What Are Construction Bonds? And Why You Should Have Them

When you begin a new project, there are many things to consider, from the price to the work schedule to the desired finished product. You can hire someone to make your dream project real, but what happens when things go south?

A construction bond  is a contract between a property owner,  a contractor and a surety bond service. They exist in most agreements with a contractor or construction company; someone you hire will likely want one. 

Here is why you should have a construction bond for your home or business projects. 

Who Construction Bonds Benefit 

A construction bond benefits you whether you are an owner or contractor. It allows you to hold the everyone accountable for breaches of contract without going through a messy lawsuit. As a contractor, using these bonds helps you build credibility and can help ensure that the job they do meets your request. 

The surety bond service holds everyone accountable for the agreed-on work and encourages honest communication throughout the construction process. You can gain compensation by consulting the service if your contractor breaches their contract. 

What is a Surety Company?

Surety bonds throughout the United States are written divisions of insurance companies. The state insurance commissioner grants permission for the company to conduct business within their state. 

Both surety and traditional insurance policies are risk-transfer arrangements. However, insurance is still a two-way agreement, while surety brings in a neutral third party. Traditional insurance covers unforeseen events, while the surety division handles funds for poor workmanship and agreements broken by unsatisfactory performance from an involved party. 

While construction bonds are one of the most popular surety bond types, these divisions work with various fields, including the automotive industry and small business contracts. 

Popular Types of Construction Bonds 

There are different construction bonds, each having advantages and disadvantages. Three types of bonds are most popular in the industry.

1. Payment Bond

This one ensures that the contractor or company fairly compensates and subcontractors or vendors they get work or supplies from. If someone isn’t paid, they can get compensation with the surety company. 

2. Performance Bond 

This construction bond helps you by guaranteeing your contractor will complete their work and meet the terms laid out in your contract. You can seek compensation for breach of contract through the surety company. 

3. Bid Bond 

These types of bonds apply when different contractors bid on the same project. It ensures that the project owner is fairly compensated if the company who won the bid doesn’t follow through with their services. 

Applying for a Construction Bond

To get a surety company to sign off on your bond, you must prove that you can afford compensatory funds. They will look at the project’s size, nature and cost to determine whether they are willing to take on the contract. 

Surety companies will also look at your credit worthiness to determine whether you will likely need to file a claim. 

Those steps are typically what’s needed for a bond under $250,000. For larger bonds, a more in-depth process will likely take place. 

The company will require a premium before the bond gets issued. 

Getting a Construction Bond 

A construction bond for a project benefits everyone involved, providing compensation for wronged parties. They encourage communication throughout the project and can lead to a better result.