Understanding the Different Types of Contract Surety Bonds

Most construction projects today require contract surety bonds. A surety bond is issued to a business entity that engages in a contract with another party. In construction, a surety bond serves as a guarantee that the contractor will uphold their side of the contract — and if not, they will be held financially liable.

However, this aspect of the industry can be tricky to navigate, as there’s a variety of surety bonds in the construction industry. Choosing the right one for your job is crucial not just for the success of a single project but for the growth of your overall business. Read on to learn about the different types of construction surety bonds that are available.

Bid Bonds

Before a project begins, bid bonds are used to reassure an obligee—usually a property owner—that the contractor will follow through on a job. As the name suggests, a bid bond is offered during the job bidding process and proves that the contractor can provide a legitimate bond for the project.

Payment Bonds

Payment bonds protect obligees, or property owners, from liens against their property. They protect property owners, subcontractors, and material providers, as this type of bond ensures that the contractor will pay everyone for their work and materials. If payment is never made, or not paid in accordance with terms laid out in a contract, then the property owner, subcontractors, or even suppliers can file a claim against the bond.

Performance Bonds

Performance bonds, often issued alongside payment bonds, ensure that contractors will perform the work outlined in the construction contract. These types of bonds guarantee that a project is completed to the property owner’s satisfaction. The property owner can file a claim against the bond if contractual obligations are not met.

Maintenance Bonds

Maintenance bonds, also called warranty bonds, ensure that no specific improvements will need to be made on the project within a specific timeframe. Contractors provide these bonds to the property owner, or sometimes local government bodies, to protect against faulty work. If maintenance is needed on the project that goes against the warranty laid out in the contract, the obligee can file a claim to cover the repair expenses.

Supply Bonds

Supply bonds relate to the provision of materials during a project and protect contractors from potential supplier defaults. Unlike the bonds discussed above, which the general contractor provides, suppliers provide these bonds to either the contractor or property owner.

Subdivision Bonds

Subdivision bonds require contractors or major developers to improve the surrounding land in a subdivision according to necessary guidelines. Examples of subdivision work include sidewalk repairs, improvements to shared vegetation, or maintenance on shared drain work. Local jurisdictions, like HOAs, will be protected from a lack of improvements or faulty work and can file a claim against the contractor if needed.