Construction bonds are a general classification of surety bond used in the construction industry. It guarantees that the principal (the contractor) will complete a project according to the terms of their contract. If they do not for any reason, the surety company will have to pay the obligee (the project owner) for their losses. There are three primary types of construction bonds:
Bid Bonds: This type of bond is usually required during the bidding process. Each contractor must submit the bond along with the bid. It guarantees that the contractor will honor the bid. The bid is usually invoked in case the principal fails to honor the bid. It is meant to cover any costs related to finding a replacement contractor.
Performance Bonds: This guarantees that the principal will perform according to the terms of the contract. It protects the obligee from sub par or defective work that does not meet the terms laid out in the contract.
Payment bond: Unlike the other two bonds, this one protects the people working under the contractor. This type of construction bond guarantees that the contractor has the financial means to pay the subcontractors, workers, and suppliers. The bond can be used to pay these workers if the contractor goes bankrupt and is unable to do so while working on the project.