3 Common Types of Construction Bonds

Contractor license bonds, also known as construction bonds, are often required by an investor in a construction projects. The bond is a surety that will protect against potential finanical loss or disruptions should the contract fail to finish the project or come short of the contract’s specifications. Bonds make sure the bills of a construction project get paid.

Bond Options

There are three primary types of construction bonds. A surety company provides the financial guarantee for each of these bonds.

1. Bid Bond

In the process of bidding for a job, contractors who are interested in the project have to submit a bid bond along with their pricing bid. This protects the project owners in case the contractor decides to back out of the contract after securing the bid or doesn’t follow through with a performance bond.

2. Performance Bond

After a contract accepts a bid, a performance bond is presented. This is the finanical protection the project owner needs in case the contract does work that doesn’t adhere to contract terms or has work that is subpar or defective.

3. Payment Bond

Also called a materials payment and labor bond, contractors offer this bond as a financial guarantee of the resources needed to compensate any workers or subcontractors. It also guarantees payment for suppliers and materials.

Contractors aren’t usually able to secure new jobs without offering one or more of these bid options. Both the contract and the surety of the bond are held liable when conditions of the contract aren’t met.