Types of Bonds

What Are the Types of Bonds Required in Construction?

In the construction industry, surety bonds occur when an insurance company becomes a co-signer on a contractor’s work. For instance, when a contractor is hired to do a job but the project fails, the insurance company is liable for the payment. There are three common types of surety bonds.

Performance Bonds

A performance bond guarantees the performance of the contractor. If the contractor does not perform according to the contract and the project owner loses money, it protects the project owner. He or she can still recover losses.

Bid Bonds

Before a contractor is hired onto a project, there may be bids offered by several contractors. The bid bond guarantees that the contractor will enter into the contract under the amount that he or she bid.

Payment Bonds

In this type of bond, the subcontractors have a guarantee of payment. This bond is between the insurance company, the contractor and the subcontractors. Most construction companies hire separate contractors for floor work, roofing, sheet metal and other special trade contractors. If subcontractors do not receive payment for their work, they can put a lien on the property. A payment bond is a protection for the subcontractors.

Often, surety bonds are required. While not insurance, they do perform the function of protecting all of the parties involved with a contracting job.