Within the construction industry, surety bonds are used as financial guarantees for the work to be done and paid for. An insurance company takes on the responsibility of securing the terms and completion specified by the contractor. There are three different types of construction bonds that could be used for a contracting project.
1. Bid Bonds
Under a bid bond, the project owner is protected in the event that the contractor does not honor the initial bid agreed upon. The owner has the right to sue both the surety of the bond and the principal (issuer of the bond and contractor) in order to enforce the bond. The surety can be held liable for the costs of the original bid and additional expenses to hire a replacement contractor.
2. Payment Bonds
With a payment bond, all payments between the principal and any subcontractors or suppliers are guaranteed. Project owners aren’t held liable for non-payment.
3. Performance Bonds
Under a performance bond, there is a guarantee that all the work will be completed by the contractor according to the terms of the contract. If the contractor fails to execute these terms, the insurance company securing the bond can be held liable to pay for the costs of a new contractor.
There are different factors for determining the eligibility of a construction bond, and these vary according to the surety company. Any party involved in a construction project should request bond coverage.