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Five Types of Construction Contract Bonds

Contractors don’t have the best reputations. Most people think that having to work with a contractor means, time delays, over budget spending and ongoing conflict. But believe it or not, it doesn’t have to be that way.

When a commercial building is under construction, building owners issue contract bonds to the contractor that keeps them on schedule and within the budget. Contract bonds are a type of surety bond that is issued by an insurance company and it ensures that the project will be completed on time by the designated contractor and that all bills will be paid. They also protect the assets of the project owner and make sure not shotty work is being done. There are five different types of construction contract bonds.

Bid or Proposal Bonds

A bid bond allows the contractor to present the owner with a bid for the project. If that contractor is chosen to complete the project, that bond protects the owner if that bid is not honored. If it’s not honored by the contractor the owner has the right to sue the contractor and the surety (the insurance company or bank issuer of the bond) for any additional costs incurred during the project.

Performance Bonds

Performance bonds hold the contractor to complete the contract in accordance with the terms laid out in the bond. If the contractor fails to do so, the surety must either hire a new contractor to finish the job or pay the owner the cost needed to finish the project.

Payment Bonds

Payment bonds ensure that payments promised to subcontractors, material suppliers and all other workers on the project are paid.

Maintenance Bonds

Maintenance bonds establish a period of time that the contractor is required to repair any problems or damages after the project is completed.

Completion Bonds

Completion bonds ensure that the owner is satisfied with the finished product when the project is complete.

Photo courtesy of FEMA Photo Library by Wikimedia Commons .