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A construction bond is a type of surety bond that protects project stakeholders from financial loss resulting from a contractor’s failure to meet their obligations. Essentially, it’s a three-party agreement among the project owner (the obligee), the contractor (the principal), and the surety company issuing the bond. If the contractor defaults, the surety steps in to ensure the project is completed and that all subcontractors and suppliers are paid, minimizing risk for the owner.
Navigating the world of construction can be complex, with various moving parts and potential risks. One crucial tool for mitigating these risks is the construction bond. Whether you’re a project owner, a contractor or a subcontractor, understanding what construction bonds are and how they work is essential for protecting your interests. This guide will walk you through the different types of construction bonds, what they cover and why they are a cornerstone of the construction industry.
Similar to construction insurance policies, construction bonds benefit everyone. In a contract surety bond, the coverage recipient is the project owner. The surety company would step in to prevent your failure from financially affecting the obligee.
On the other hand, construction insurance covers you, the insured party — whether you work as a general contractor or a subcontractor — from perils. This product shields you from financial loss when a covered incident, like an act of God or a worksite accident, results in injury or property damage.
A surety company will pay out when you breach the contract. Conversely, construction insurance providers write a check whenever a covered event occurs as spelled out in the policy, whether you fulfill your contractual obligations or not.
You usually have to pay your bond premium once and up front. In contrast, your insurance premiums are regular bills as long as the policy is active.
Construction bonds come in many types, with the exact number varying by source. Although some are more prominent than others, each type has unique merits. These 10 construction bonds are common types you may encounter and need to purchase at various stages of a project.
|
Type |
Description |
|
Bid Bond |
Ensures the winning contractor will honor their bid and sign the contract for the agreed-upon price. |
|
Performance Bond |
Protects the project owner by guaranteeing that the contractor will complete the work in accordance with the contract’s terms. |
|
Payment Bond |
Guarantees that the contractor will pay their subcontractors, laborers and material suppliers involved in the project. |
|
Maintenance Bond |
Warrants that the contractor will fix any defects in workmanship or materials for a specified period after the project is finished. |
|
Subdivision Bond |
Assures a government agency that a developer will complete the required public improvements, such as roads and sewers, in a new subdivision. |
|
Supply Bond |
Ensures a supplier will provide the materials or supplies as outlined in their contract with the purchaser. |
|
Site Improvement Bond |
Guarantees that a developer will complete specific improvements on a piece of land as required by a municipality. |
|
Completion Bond |
Assures the project’s lenders that construction will be completed on time and within budget, free of liens. |
|
Ancillary Bond |
Covers various miscellaneous obligations required by a contract that are not covered by the standard performance or payment bonds. |
|
Release of Lien Bond |
Allows a contractor or property owner to remove a lien from a property by providing the bond as security for the lien claim. |
While the construction bonds mentioned above all provide security, each serves a distinct purpose at a different stage of a construction project. Understanding their specific functions is key to managing risk effectively. Here’s a closer look at what each bond covers and how it protects the different parties involved.
This bond is submitted with a contractor’s bid and protects the project owner if the winning bidder fails to enter into the contract. It ensures good faith by covering the cost difference between the low bidder and the next-highest bidder if the winner backs out.
A performance bond guarantees that the contractor will complete the project in accordance with the plans and specifications outlined in the contract. If the contractor defaults, the surety steps in to ensure the project is finished, protecting the owner from financial loss and project abandonment.
This bond provides a guarantee that the primary contractor will pay all their subcontractors, laborers and material suppliers. It is vital for preventing mechanics’ liens from being filed against the property, which could halt the project and create legal issues for the owner.
Also known as a warranty bond, this protects the project owner against faulty workmanship or material defects for a specified period after project completion, typically 1 to 2 years. It ensures the contractor will correct any issues that arise during this warranty period at no extra cost.
Required by municipalities, this bond guarantees that a developer will finance and construct all necessary public improvements in a new subdivision, such as streets, sidewalks and sewer systems. It protects taxpayers from shouldering these costs if the developer fails to complete the work.
This bond guarantees that a supplier will deliver materials and equipment as specified in their purchase agreement. It protects the contractor or project owner by covering the costs of acquiring supplies from another source if the original supplier fails to deliver on time.
This guarantees that a developer will complete specific improvements to a piece of property, such as landscaping, drainage or grading, as required by a municipality. It ensures the land is developed in accordance with local ordinances and approved plans, even if the developer defaults.
A completion bond provides a strong assurance to the project’s financiers (lenders or investors) that the project will be completed on time and free of liens. It reduces the risk for lenders, ensuring the asset they are financing will be fully constructed and unencumbered.
Ancillary bonds are used to cover a wide range of miscellaneous obligations not included in standard performance and payment bonds. They can be used to ensure compliance with specific requirements, such as hazardous material cleanup or adherence to local union rules.
This bond guarantees that you will receive the portion of the contract price withheld by your client until you finish the project. You should receive the retention payment after the project owner approves your work.
Not always. The Miller Act requires performance and payment bonds for all public work contracts over $100,000 for the federal government. Many states have their own versions of this law, often called “Little Miller Acts,” for state projects. For private projects, the owner decides whether to require bonds.
The cost, or premium, for a construction bond typically ranges from 1.5% to 3% of the total contract price. This percentage varies based on the contractor’s credit history, financial stability and experience.
If a contractor defaults on the project, the project owner can file a claim against the bond. The surety company will then investigate the claim. If it’s valid, the surety will step in to fulfill the contract’s obligations, which could mean hiring a new contractor to finish the job or paying for the financial losses up to the bond’s value.
Posting a construction bond doesn’t mean you get a pass for doing bad work. It’s your business expense whether the obligee claims it or not, plus you must convince a surety company to sign off on your guarantee. Although you can’t avoid required bonds to win construction contracts legitimately, use them as a means to an end — that is, to grow your business and build a solid reputation in the industry.
Note: This article was first published on August 8, 2023, and was revised on August 20, 2026, to reflect the most current information.
