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What is a Contract Bond?
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A contract bond is a type of surety bond that guarantees contracts are fulfilled. These bonds are most commonly used in the construction industry to ensure projects are completed according to the contract.
For this reason, “contract bond” and “construction bond” are often used interchangeably. If the contracted party fails to fulfill its duties according to the bond’s terms, the project developer can make a claim on the bond to recover financial losses.
Surety bonds are almost always required before work can begin on public projects. Private project developers can also require contractors to file certain types of surety insurance before work can begin on their projects.
Construction Surety Bond Types
- Bid bonds reassure project developers that contractors submit serious bid proposals and have the financial credentials necessary to accept the job. If a bid is selected and the contractor declines the job or retracts the bid, the project developer can make a claim on the bond to collect the difference of the original bid and the next highest bid.
- A contractor license bond is a type of license and permit bond. Contractors must purchase these bonds before they can receive their contractors license to ensure contractors follow all applicable licensing laws and regulations.
- Maintenance bonds protect against defective materials and workmanship following a project's completion. If the project is found to be defective following completion, the bond amount can be used to pay for repairs that need to be made.
- Payment bonds guarantee payment for services in the case lead contractors go bankrupt when working on projects. The bond amount can be used to reimburse those who worked on a project if the lead contractor is unable to pay them for their work.
- Performance bonds guarantee that contractors complete construction projects according to the contractual terms. If a contractor fails to do so, the project developer can make a claim on the bond to access funds that can be used to pay another contractor to finish the job. The Federal Miller Act requires that performance bonds be used on all federally funded projects worth $100,000 or more.
- Site improvement bonds guarantee the completion of certain renovations and/or improvements made to projects, properties or structures.
- Subdivision bonds require contractors to build and/or renovate public structures within subdivisions - such as streets, sidewalks and waste management systems - according to local specifications. If a contractor fails to do so, the bond amount can be used to complete the subdivision project appropriately.
- Supply bonds mandate suppliers to provide materials, equipment and supplies as defined in purchase orders. If the supplier fails to provide the supplies as agreed, the bond amount can be used to reimburse the purchaser for the resulting loss.