Construction surety bonds are guarantees which are usually required in order for a construction company to bid on projects and/or be allowed to proceed on a project awarded to them. Performance and payment bonds are only required if the bidding construction company wins the bid and is awarded the contract. If the contractor defaults, the surety company is obligated to find another contractor to complete the contract or compensate the project owner for the financial loss incurred.
There are three types of surety bonds:
- Bid Bond: Ensures that the bidder on a contract will enter into the contract, honor its bid and furnish the required performance and payment bonds if awarded the contract.
- Performance Bond: Ensures the contract will be completed in accordance with the terms and conditions of the contract, including price and time.
- Payment Bond: Ensures that suppliers and subcontractors are paid for work performed under the contract.
When do I need a surety bond?
Any Federal construction contract valued at $150,000 or more requires a surety bond when bidding or as a condition of contract award. Most state and municipal governments, as well as private entities, have similar requirements. Many service contracts, and occasionally supply contracts, also require surety bonds.