Surety Bonds for General Contractors Help Guarantee Project Completion

By Nick Raffoul

July 8, 2019

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  Construction bonds are a means of redistributing the risks associated with a particular construction project. While a surety company may be a part of an insurance company, a surety bond is not your typical insurance policy. Surety bonds consist of an agreement between three parties: a surety, a principal, and an entity that will benefit from the issuance of the bond. Surety bonds for general contractors provide support and additional assurance for project owners looking to manage their level of risk effectively. On privately funded projects, bonds can be used to create a smooth transition from construction financing to permanent financing, ensure project completion, and provide support to the contractor. On public projects, surety bonds support prequalification of contractors, payment protection for subcontractors, and contract completion protection for project owners.

Types of Contract Surety Bonds
There are three types of contract surety bonds that are commonly used in construction:
(1) Bid Bonds,
(2) Performance Bonds,(3) Payment Bonds.

Bid Bonds
Construction bidding is the process of submitting a proposal or tender to undertake and/or manage the undertaking of a construction project. A bid bond acts as a form of security to ensure that the contractor chosen by a tendering authority will enter into the construction contract with the owner. If the contractor that wins the bid refuses to enter into a construction with the tendering authority, the tendering authority may seek compensation under the bond for the difference between the tender price of the defaulting contractor and the amount for which the tendering authority contracts with another person – up to the face value of the bid bond.

Performance Bonds
A performance bond acts as a guarantee for the successful and satisfactory completion of a project, binding the surety to the obligee in the amount of the bond value. This obligation is relinquished upon completion by the principal of its obligations under the construction contract. Performance bonds protect both the contractor and owner in the case of unforeseen events and delays. These bonds are generally issued for 50% or 100% of the amount of the contract.

Payment Bonds
Payment bonds provide protection to project owners by assuring that contractors will pay certain workers, subcontractors, and material suppliers. Payment bonds are usually issued for 100% of the contract value. Performance and payment bonds are usually bundled together to provide additional protection to all parties.

Are Surety Bonds Necessary or Discretionary?
Surety bonds for general contractors and project owners are a safe way to minimize the risks involved in undertaking major construction jobs. On privately funded ventures, such as government projects, surety bonds are required in order to provide assurance to all parties involved that the project will be completed on time and that the contractor will perform its obligations under the contract according to its terms and conditions. However, on construction projects that are publicly funded, the use of surety bonds are at the discretion of the project owner and general contractor.