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Construction Bond Types

Construction bonds are guarantees written by an insurance company or a bank to guarantee the timely delivery of materials and the services associated with them to a construction project. When a contractor wins a bid on a construction job, bonds will be required to insure the work.

Bonds are a requirement whether the job is commercial or government construction. A construction bond can be written for a variety of purposes in property development projects. Here are some bond types prevalent in the construction industry.

Bid Bond

This type of bond is a guarantee that the winning bidder will stand by the terms of the original bid that was awarded the construction job. The bond insures that the extra costs incurred if the winning contractor breaks the contract will be paid for.

Supply bond

The principal often requires suppliers and subcontractors to participate in a supply bond. The supply bond stipulates that the labor and materials for the construction will be provided as mentioned in the contract. This protects a principal against extra costs incurred because of an extended building period.

Performance Bond

A performance bond is a guarantee that a contractor will complete the construction satisfactorily per the project contract. If the contractor does not complete the project up to the contract standards, the developer can be compensated up to the total construction bond value.

Payment bond

An owner of a property issues a payment bond to the principal of the project pledging to pay the amount of money for the project that was agreed on in the contract. This type of bond insures the principal against the risk of the owner failing to live up to contract agreements. If an owner fails to honor this bond, the principal can either sue the owner or stop work on the construction.

Whether the project is municipal construction or commercial, there are a variety of construction bond types to insure construction projects. Bonds provide compensation in the event of service and material failures to make sure that work is completed in a satisfactory manner.