Understanding the Types of Construction Bonds

Some construction projects do involve multiple contractors or subcontractors. These contractor’s schedules are mostly interdependent. The entire project might stall if one contractor fails to perform its duty. Or, the project might only have a single contractor. The contractor, though, might also delay in completing the project on time. The cost of a project significantly increases when it fails to complete on schedule. When a project owner or a contractor feels the risk of a poorly completed job or a defaulted job is too high, they protect themselves through a construction bond. 

So, What Exactly Is A Construction Bond?

A construction bond is a surety that the contractor will complete your project on time and in the proper manner. It works like an insurance policy. You get compensated if the job is not completed in time or done in a substandard manner. If the contractor responsible defaults on the construction, the project owner gets compensated for the associated losses. There are different types of construction bonds. Read on to gain an in-depth understanding of the types of construction bonds.

1. Bid Bond

A bid bond ensures the project owner you are capable of undertaking the project should your bid win. The bid also means you will compensate the project owner if you pull out after being selected to undertake the project. 

It compensates the project owner for the time and the resources they will use to contact another bidder. A bid bond discourages bidders from pulling out of the project. Some bidders might be tempted to do so when they find out how much other entities have bid. 

2. Performance Bonds

As the name suggests, a performance bond guarantees the project owner that the contractor will finish the job. As the professionals behind this URL explain, It also guarantees the project owner that the contractor will comply with the project’s set standards. 

In other words, the job will not be substandard. If the contractor fails to complete the project or performs a substandard job, the project developer can use the bond to find another contractor. 

3. Payment Bond

A payment bond ensures the subcontractors or other workers get paid if the contractor runs into financial difficulties. If the general contractor files for bankruptcy, for example, the bond money the general contractor placed will be used to clear the outstanding wages. The bond also pays the suppliers who were working on the project. 

4. Maintenance Bonds 

Every contractor claims their work is the best. Sadly, that’s not always the case. A maintenance bond works like a warranty on the project. This means the contractor can pay the bond if the project shows any flaws after its completion. 

The maintenance bond does not run for a lifetime. It expires after some time. If the contractor refuses to carry out the repairs while the maintenance bond is valid, the project owner claims the bond and uses it to cater to the repairs.

5. Supply Bonds 

A contractor or a project owner is more likely to work with a supplier who places a supply bond. The supply bond ensures that the supplier will supply the materials required for the project. If a supplier defaults on providing the materials, the contractor or the project owner can use the bond amount to source materials from other suppliers. 

6. Retention Bond

Usually, general contractors retain 5 to 10% of payments to their subcontractors. The retainage ensures the subcontractor will continue with the project. The general contractor can use the withheld payment to cover expenses should the subcontractor fail to complete the project. 

A subcontractor can replace the retainage with a retention bond. The retention bond is a surety that the subcontractor will complete the project. With a retention bond in place, a subcontractor receives their full reimbursement every payment period. Should the subcontractor default on completing any project phase, the contractor will claim the retention bond to hire another subcontractor. 

7. Contractor License Bonds 

All the other bonds discussed above are project-specific. It means they protect the particular project the contractor is undertaking. On the other hand, the contractor license one is a surety that the contractor will carry out their duty to the best of their ability- no matter the project. 

In some states, you can’t operate without the contractor license bonds as a constructor. In other states, the bond is not a requirement. If you are a project developer, it’s prudent to work with a contractor’s license bond. It means they will work ethically and meet all set standards.

The construction industry is one of the most challenging fields. From poor workmanship to surpassed deadlines. Luckily, as a project developer, you have a solution. Construction bonds protect you from substandard work, default on your project, or incompleteness of the project by the contractors. With the above knowledge of construction bonds, it’s possible to sleep easily, even with a project underway.