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Contract Bonds – Construction Bond

Contract Bonds are sometimes referred to as construction bonds. It is a guarantee of the performance of a contractor. In general, contract bonds are used to guarantee that the contractor will perform according to the specifications of the construction contract.

If the contractor fails to perform according to contract, the insurance company is responsible to the insured for payment, up to the limit of the bond, which is usually for an amount equal to the cost of the construction project. The insurance company then has recourse against the contractor for reimbursement.

Types of Contract Bonds

Bid Bond

A Bond required of a contractor submitting the lowest bid on a project. If the contractor then refuses to undertake the project, the bid bond assures that the developer will be paid the difference between the lowest bid and the next lowest bid. The bid bond encourages contractors to make serious bids and live up to their obligations.

Payment Bond

A Bond guaranteeing that a contractor will pay fees owed for labor and materials necessary for the construction of a project. If these fees are not paid, an owner who has paid the contractor might be confronted with subcontractor’s or worker’s liens filed against the completed project. If this happens, the owner could end up paying many times the value of the work done.

Performance Bond

A bond issued to one party of a contract as a guarantee against the failure of the other party to meet obligations specified in the contract.

Material Bond

Issued to a contractor guaranteeing that the supplier (individual posting the bond) will provide all of the necessary materials for the satisfactory completion of the contracted project.

Maintenance Bond

This bond guarantees that the work done by a contractor is without defects for a specified amount of time after completion.

Supply Bond

A bond that guarantees that materials delivered comply with contract documents.

Site Improvement Bond

This bond ensures that mandatory improvements will be made to a property. Site Improvement bonds are much like subdivision bonds except for existing structures.

Subdivision Bond

The Subdivision Bond is similar to the site improvement bond except for new structures. This bond guarantees that city or state mandatory improvements will be made to their property.