Overview of Contract Bonds:

Contract Surety Bonds provide financial security and construction assurance on building and construction projects by assuring the project owner (obligee) that the contractor (principal) is qualified to perform the work and will pay certain subcontractors, laborers, and material suppliers. With a surety bond, the surety company and its financial resources stand behind the contractor, which enables the contractor to enter into a contract.

What can a contractor do to avoid a claim against a bond?

* A contractor should always put the terms of a construction contract, and any amendments, in writing.

* A contractor should maintain accurate records of all funds paid and received, and confirm in writing any agreements reached if the project is terminated.

* A contractor should communicate frequently and effectively with project owners and prime or subcontractors regarding any potential or actual problems.

Many claims against the bond are filed by subcontractors and suppliers for nonpayment of invoices. These claims can often be avoided by communicating with the suppliers, making them aware of circumstances that may have prevented payment, and proposing a reasonable plan to pay. Business associates are more inclined to make reasonable arrangements when they are kept informed of unusual circumstances. 

Common Contract Bonds:

Bid Bond:

Assures the Owner that there is good faith in submitting the bid. It also demonstrates that the contractor is entering into the contract at the bid price. In addition, it guarantees the contractor will provide the required performance and payment bonds.

Performance Bond:

The Performance Bond protects the Owner from financial losses due to a contractor's failure to perform according to the terms and conditions of the contract.

Payment Bond:

Guarantees that all subcontractors, workers, and suppliers of material are paid in the event a contractor defaults on any payments to these entities. This prevents the subcontractors, workers and material suppliers from filing mechanics' liens against the project.