A construction bond, also known as a surety bond, protects a project owner if a contractor fails to complete a job, doesn’t pay for permits or fails to meet other financial obligations such as paying for supplies or subcontractors.
Surety bonds are important, and quite common, in the construction industry. They typically come in three types:
- A Bid Bond is issued to the project owner to provide a guarantee that the winning bidder will honor the contract under the terms at which they bid.
- A Performance Bond guarantees that the contractor will perform the services as described in the contract. A bid bond is replaced by a performance bond when a bid is accepted and the contractor proceeds to work on the project.
- A Payment Bond guarantees that a construction company will pay its laborers (employees and subcontractors) and suppliers throughout the construction project.
A surety bond is a contract between three parties:
- The Principal is the party purchasing the bond and undertaking an obligation to perform the job as promised.
- The Obligee is the party requiring and receiving the protection of the bond.
- The Surety is the insurance company or surety company that guarantees the obligation will be performed.
How do you know if you need a construction bond? The project owner will decide.
Kristina Campbell has been working with contractors across Maine for their insurance and bonding needs for more than 15 years.