Contract Bonds

  1. Contract Bond Types
    1. Bid Bond
      1. Definition: assures that the bid is submitted in good faith and that the Principal enters into the contract at the price bid and provides the required performance and payment bonds
      2. Provides the Obligee with confidence that the Principal is serious about getting the job and financially capable of completing the project and that the Guarantor stands behind the work
      3. Pre-qualification process:
        1. Performance capacity
        2. Financial strength
        3. Track record
        4. Company history
        5. Organizational structure
        6. Reporting Business continuation plans
        7. Trade references
        8. Analysis of all projects in process
        9. May require your personal financial information as an owner of the construction firm
    2. Performance Bond
      1. Definition: protects the Obligee (owner of the project) from financial loss should the Principal fail to perform the Contract in accordance with its terms and conditions
      2. Assures that the Principal (you, the contractor) and all subcontractors will complete a project to the exact Contract specifications
      3. Prevents financial loss for a project owner should a contractor not satisfactorily complete the job
      4. Problem with the Project because of inadequate performance
      5. Wronged party files a claim on the bond
      6. Surety that issued the bond will validate the claim and make all parties whole
      7. Legally binding contract among three parties:
        1. Principal (you, the contractor)
        2. Obligee (entity that you have the contract with)
        3. Surety / Guarantor (company supporting the bond)
    3. Payment Bond
      1. Definition: Ensures that subcontractors will be paid according to the terms established in the contract and applicable laws in the state in which the contract is being performed
      2. Since a mechanic’s liens cannot be placed against public property, this bond may be the only protection claimants have if they are not paid for the goods and services they provide to the project
      3. Private jobs also involve a Payment Bond to be able to extend protection to the subcontractors and suppliers. This can help when negotiating prices from subs and suppliers because they know they will get paid.
    4. Labor & Materials Bond
      1. Definition: Issued with (and for the same amount as) a Performance Bonds, and covers payment for all equipment, labor, materials, and services in the event the Principal fails to pay for them under the terms of the contract Posted to guarantee payment for the labor and material used
    5. Maintenance Bond
      1. Definition: Guarantees against defects and according to the contract terms and without errors for a specific time period following a project’s completion