The 4 most common types of contract bonds

 May 13, 2020     UFG Insurance    Surety 
Contract Bonds

Contractors understand the importance of getting the job done correctly, on time and within budget.

But project owners need to see more. That’s where a contract bond comes into play.

There are two primary types of bonds. A contract bond helps ensure that the obligations of a construction contract will be met—plus it gives your clients peace of mind when working with you. On the contrary, a commercial bond is typically required because of a legal statute, whereas a contract bond is executed by the existence of a formal contract.

We’re here to discuss the four most common types of contract bonds and why you might need each to do business.

1. Bid bonds

A bid bond provides financial protection to the obligee. As the name suggests, this guarantees that if you bid on a project and are awarded the contract, you'll follow all terms and conditions related to the project. This helps prevent contractors from submitting a low bid to get the project and then changing the terms of the contract before work begins. It also helps weed out unqualified bidders, as a surety will not issue a bid bond on behalf of a contractor that it believes cannot fulfill the contract. Bid bonds are typically the most common type of contract bond and in most cases there is no charge for a bid bond

2. Performance bonds

A performance bond guarantees that you, the contractor, will adhere to all terms of the contract and finish the job as promised. In the event that the contractor defaults on the contract, a performance bond ensures the surety can be called upon to complete or find someone to complete the contract at hand. It’s a great way to provide the obligee with peace of mind. This bond also requires that contractors stay on budget and meet predetermined deadlines. A surety will only issue a performance bond if it believes the contractor can complete the contract in accordance with the plans and specifications.

Read: How much does a surety bond cost? 

3. Payment bonds

A payment bond is very common because it acts as a guarantee to your subcontractors and suppliers that you'll pay them in full for all services and/or materials they provide to you. A supplier or laborer has a right to make a claim against a payment bond if the bonded principal (the contractor) fails to pay for labor and project materials. 

4. Maintenance (warranty) bonds

This type of bond guarantees that all workmanship completed on a project is dependable and meant to last. It helps protect the end client for a predetermined length of time, like a warranty, after the project is completed. If any work defects are found in the original construction, they will be addressed during the specified warranty period. 

We hope you have a better understanding of contract bonds and how they fit in the bonding landscape. Curious to learn more about how much surety bonds cost? Read our interview with  UFG Surety’s Kyanna Saylor.

Remember, it’s important to discuss every aspect of bonding with your surety—a surety you can trust and depend on. If you’re interested in bonding or looking for a new surety, contact a UFG Insurance agent today. 

The information provided is for informational purposes only. Every attempt is made to ensure that the information is accurate; however, it is not intended to replace professional advice. For more information, see Disclaimers & Other Legal Documents.