What’s the difference between contract bonds and construction bonds?
SuretyBonds.com is legally licensed to issue contract bonds in every state. Whether you’re a construction professional in Texas, California, Florida or Washington, we can bond you!
With more than 25,000 unique surety bond types available nationwide, the experts here at SuretyBonds.com know that distinguishing one from another can be confusing. That’s why we developed this guide to bonding in the construction industry.
The terms “contract bond” and “construction bond” are essentially two different names for the same thing. A contract bond is a type of surety bond that guarantees contracts are fulfilled. If the contracted party fails to fulfill its duties according to the bond’s terms then the project developer can make a claim on the bond to recover financial losses. Although they can be used for many reasons, contract surety bonds are most commonly used in the construction industry to ensure projects are completed according to contract. For this reason, “contract bond” and “construction bond” are often used interchangeably.
Project developers might require a number of different construction bond types throughout the duration of a project to ensure it’s completed according to contract. Surety bonds are almost always required before work can begin on public projects – especially those that are federally funded – but private project developers can also require contractors to file certain types of surety insurance before work can begin on their projects.
The following are some of the most common types of contract bonds.
Construction Surety Bond Types
- Bid Bond
- Bid bonds make sure that contractors submit serious bid proposals. These bonds reassure project developers that bidders 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 recoup the difference between that bid and the next-highest bid.
- Performance Bond
- Performance bonds guarantee that contractors complete projects according to 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 a second 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.
- Payment Bond
- Payment bonds guarantee proper payment for services in case lead contractors go bankrupt when working on projects. The bond amount can be used to reimburse suppliers, subcontractors and others who worked on a project if the lead contractor is unable to pay them for their work. The Federal Miller Act requires that payment bonds be used on all federally funded projects worth $100,000 or more. In fact, these bonds are frequently issued in conjunction with performance bonds.
- Supply Bond
- Supply bonds mandate that suppliers provide materials, equipment and/or 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.
- Maintenance Bond
- Maintenance bonds guarantee against defective materials and workmanship for a specific time period following a project’s completion. If the project is found to be defective during this time, the bond amount can be used to pay for repairs that need to be made as a result.
- Subdivision Bond
- 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.
- Site Improvement Bond
- Site improvement bonds guarantee the completion of certain improvements made to projects. They’re typically used for renovation projects that update older structures or other existing properties.
- Contractor License Bond
- Even though they’re actually a type of license and permit bond, contractor license bonds are often mistakenly grouped in with contract bonds since they’re used by construction professionals. Contractors must purchase these bonds before they can receive their contractors licenses at the state, county and/or city level. These bonds ensure that contractors follow all applicable licensing laws and regulations.