Construction Surety Bonds

A performance bond guarantees project completion according to the terms of the surety bond agreement and construction contract. The bond ensures that funds will be available to the obligee (the project owner) in the event that the principal produces unacceptable results or becomes insolvent and defaults on the contract, and other arrangements must be made to complete the work.

A payment bond ensures that the principal will pay workers, subcontractors, and suppliers according to the terms of the construction contract. A payment bond is often required in conjunction with a performance bond.

A bid bond is the principal’s guarantee that their bid is a serious one and that the principal will accept the contract if chosen as the winning bidder. Having to start the bid process all over again because the winning bidder backs out can be a significant expense, which the bond will cover.

An advance payment bond is only required when a contractor has received an advance payment against the contract total from the project owner. This is one way in which contractors are able to get the work underway and maintain adequate cash flow. The bond is the principal’s guarantee to return the advance payment if the principal is unable to meet the terms under which the advance was made.

Contractors purchase maintenance bonds as a way of providing a period of protection for project owners after the contract has ended. The bond covers the cost to remedy problems caused by poor design, faulty materials, or poor workmanship for a specified length of time after project completion.

In states and local jurisdictions that require licensing of contractors, a contractor license bond serves as the contractor’s guarantee to operate in compliance with all applicable laws and rules governing the construction industry in that area.

A supply bond is a contractor’s guarantee to furnish and use all supplies and materials as detailed in the construction contract. The purpose is to ensure that the money paid to the contractor by the project owner is used as intended and that lower-quality items aren’t substituted for what is specified in the contract.

Reclamation bonds are commonly required in the mining industry to ensure that once mining operations are finished, the land, including any diverted streams or other water sources, is returned to its original condition. These are particularly common when the federal government has jurisdiction over the land in question.

A subdivision bond is a type of performance bond that serves as a developer’s guarantee that the work done on roads, sidewalks, and landscaping in newly constructed subdivisions or commercial areas will meet all applicable regulations and standards and be completed within the required timeframe. This type of construction surety bond is also referred to as a plat bond, named after the drawings (or “plats”) a developer submits to a municipality to show the way the land is being divided.

Site improvement bonds are exactly the same as subdivision bonds with one important exception—they are for improvements to existing subdivisions and commercial areas, while subdivision bonds are for new construction.

Contractors who build, maintain, and repair highways are typically required by the federal, state, or local entity issuing the contract to purchase a highway bond, which is essentially a performance and payment bond. The bond guarantees that the work will be done and that workers, subcontractors, and suppliers will be paid in accordance with the terms of the contract.

Contractors hired to place “encroachments” such as cell towers, utility poles, or billboards on private property adjacent to public property must first obtain an encroachment permit. The permit is typically obtained from the state’s Highway Department or Department of Transportation. Purchasing an encroachment bond is a prerequisite for obtaining that permit. The bond is the contractor’s guarantee to preserve and protect public property adjacent to where encroachments are being installed and to restore that public property to its original condition when the installation is completed.