4 Most Common Types of Contract Bonds

Surety bonds are an essential part of doing business as a contractor, and there are several types you’ll run into while bidding on or engaged in construction projects. While some surety bonds are more obscure and uncommon, other more common types should be understood. Part of that understanding is first identifying which surety bonds are required for legal reasons and others made necessary due to a contract

Below you’ll find the most popular types of surety bonds required in a contract.

1

Bid Bonds

One of the more common types of contract bonds is the bid bond, which is required during the construction bidding process. It essentially guarantees to the project owner that the contractor bidding will compensate the owner if they fail to enter into the contract and provide any other required surety bonds if the contractor is low and awarded the contract. Bid bonds are a type of surety bond that is required for all public construction projects but they can also be required for private projects as well. 

To learn more about applying for bid bonds, we strongly encourage you to read here:  Bid Bonds – CSBA

2

Performance Bonds

A performance bond is a type of contract bond that guarantees that the contractor who is providing the construction work will meet the obligations outlined in the contract. This bond type provides assurance to the project owner.  If the contractor defaults and can’t finish the job, the contractor’s surety company will have to step in to complete the work per the terms and conditions of the contract.

Performance bonds are often confused with insurance, which is a common reason given as to why a contractor would go to their insurance agent instead of a surety specialist. A performance bond is a very different product than insurance and although an insurance agent can provide a performance bond, that would be like asking a plumber to fix your roof. 

To learn more about performance bonds, we encourage you to read here:  Performance Bonds – CSBA

3

Payment Bonds

Payment bonds give assurance to the project owner that all of the subcontractors, laborers, and material suppliers on the job will be paid. This type of contract bond is required on public projects.  Since public property cannot be liened, it gives the subcontractors, laborers, and material suppliers protection as well by allowing a way for them to file a claim on a job if they aren’t paid properly by the general contractor. The payment bond is also a very common type of surety bond for general contractors to require from their subcontractors, to give the general contractor assurance that their subcontractors will properly pay their laborers, subs, and suppliers per the terms of the contract. 

To learn more about how payment bonds work, we encourage you to read here:  How Does a Payment Bond Work? – CSBA

4

Warranty Bonds

The warranty bond is another type of surety bond that is commonly required in construction contracts. This surety bond provides assurance to the project owner for a defined period of time after the construction project is completed. The bond provides a guarantee that the contractor will come back to make corrections if the materials or workmanship has failed to meet the contractual obligations during the defined period of time after project completion.  A one-year warranty period is standard but some contracts might call for a longer term. 

If you’re a newer contractor company and feel this may be one of the contract bonds you’re likely to run into, we encourage you to read this article to better prepared for the bonding process:  What Sureties Look For When Bonding Newer Construction Companies – CSBA

Get Expert Guidance Through Common Types of Surety Bonds

There are many types of surety bonds a contractor will run into while pursuing construction jobs, but the ones listed above are the 4 most common types of contract bonds that you should familiarize yourself with. No one can be expected to be an expert in all things, but having a general knowledge of the surety bonds your company is likely to run into is in everyone’s best interests. 

For those reasons, it’s important to align yourself with a seasoned surety expert and get professional guidance through the bonding process. Here at CSBA, we are committed to helping our clients beyond getting them the types of contract surety bonds they need for any one job. We want to help them grow and succeed; which means sharing our knowledge and providing guidance. 

Contact one of our surety specialists today to learn how to grow your bonding capacity and receive professional guidance in gaining better surety premiums, as well as the contract bonds you need. You build California, and we’ll make sure you get the surety bonds to do so.

Arturo Ayala.
About The Author

Arturo Ayala

Senior Underwriter

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