What is a Contract Bond?
Since this type of bond is nearly exclusive to the construction industry, the terms “contract bond” and “construction bond” are interchangeable. A type of surety bond , construction bonds guarantee that specific terms of contracts are fulfilled. If the contracted party fails to fulfill its duties, the party for whom the work is being done can file a claim on the bond to recover financial losses it may incur.
When are these Bonds Used?
Surety bonds of this type are almost always required before work on public projects can begin. However, private project developers can also require contract bonds before contractors begin working, in order to protect their finances.
Types of Contract Surety Bonds
When a client enters into negotiations or the bidding process in regards to a construction contract, he or she will undoubtedly have a concern on whether or not the potential contractor is both competent and capable of doing the work. Several questions should be answered during this process, which include:
Bid bonds are used to ensure project developers that contractors who bid for a given job have the financial capabilities necessary to complete it. Since project owners don’t always know if a contractor is financially capable of undertaking a project, bid bonds provide them with comfortability. If the contractor can’t complete the job, they can collect payment from the bond.
Performance bonds guarantee that contractors will complete contracts according to the terms agreed upon. If a contractor fails to do so, the project developer can make a claim on the bond in order to access funds that can be used to pay a different contractor to complete the job. [link to performance bonds page once it’s up]
Maintenance bonds protect the owner of a completed project from faults in materials, workmanship and design that could potentially occur if the project was not done correctly. The time for which the project developer is covered by a maintenance bond is specified in the contract terms. If a maintenance issue does arise, the contractor is to solve it, or else a claim can be made upon the bond to provide the project developer with finances to hire a different contractor. [link to maintenance bonds page once it’s up]
Oftentimes, a mixture of these bonds will be issued at the same time. For example, labor and material payment bonds are often requested in tandem with performance bonds. Supplementing one type of contract bond with another helps provide maximum protection for a project developer.
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