How Construction Contract Bonds Work

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Contract bonds are a requirement for bidding on public and private projects across the United States. Similar to other types of surety bonds, constructions bonds are a three-party agreement between the contractor (who needs the bonding), the entity requiring the bond (the project owner or obligee), and the surety (that underwrites the bond). With a construction bond that guarantees performance and payment in place, the project owners can make a claim if the contractor defaults or violates contractual obligations. The key construction contract bonds required for bidding on public and private projects include bid bonds, payment bonds, and performance bonds.

Most federal construction projects and the majority of state and local projects above $100,000, require contractors to obtain both payment and performance bonds. Payment bonds safeguard subcontractors and suppliers. They provide assurance that the main contractor will make all payments due on labor and materials. Performance bonds directly protect the project owners.

To avoid any mistakes or misunderstandings before obtaining a contract bonds, make certain that you and your contracting firm have a firm grasp of all the details of the process and you work with a knowledgeable surety broker.