A construction bond is a type of surety bond. As outlined in our article about general contractors insurance it is considered a legally binding contract.
The contract is between a surety, a principle, and the obligee.
- The surety: The insurance company that backs the bond.
- The principle: This typically refers to the contractor in question.
- The obligee: This is the agency or entity requiring the surety bond.
The contract guarantees that the work being done is completed as specified and in the correct length of time.
What is the Role of the Surety?
The ‘surety’ is the company that backs the bond you’re purchasing. They step in—if you are unable to complete a project or do not fulfill your obligations—and reimburse the project owner when necessary.
Are There Different Kinds of Bonds?
There are 4 common types of bonds that may be required to bid on a contracting job.
A bid bond is a means of protection for the owner/developer in the case of a bid not being honored. It also proves that you can supply both a performance bond and a payment bond if necessary. If your bid is accepted and you retract your bid or bow out of the project for whatever reason, the developer can make a claim against your bid bond to cover the difference between your bid and the next highest bidder.
A performance bond is a contract in which the constraints of the construction project are laid out. If they break the requirements of the contract, the developer can claim restitution for the cost of hiring another contractor to complete the project.
This bond signifies that you’ll pay everyone under your employ—subcontractors, vendors, laborers, supplies, and so forth. If the construction company were to file bankruptcy, this bond can be used to reimburse those completing the project.
This bond acts as a type of warranty for your work. If something completed is faulty or defective for a specified length of time after the completion of a project, this can help reimburse costs incurred to fix the defect and/or damage.
Other types of bonds may be required to bid on a federal project, but the above-mentioned are the most common.
Can I Get a Construction Bond for All of My Projects?
There are some exclusions that must be taken into account:
- Projects on Indian Reservations: Excluded because they do not have to adhere to certain federal laws and regulations.
- Anything being constructed outside of the United States: Excluded, again, because anything outside of the U.S. doesn’t fall under federal law/government.
- Construction jobs completed over a timeframe of 3+ years: Surety companies are hesitant to back contracts that are long-term; especially if the construction company that won the bid is engaged in multiple projects, increasing the chance they default on the bond.
- Home remodeling projects: Unless this is paid for by the federal government, it is considered a private project and does not qualify.
What is the Miller Act?
According to the U.S. General Services Administration, “The Miller Act requires that prime contractors for the construction, alteration, or repair of Federal buildings furnish a payment bond for contracts in excess of $100,000”. The goal is to protect subcontractors and suppliers who are employed to work on a federal project.
Is a Contractor License Bond the Same Thing?
The short answer is not always. A contractor license bond—also referred to as a construction license surety bond—is required in some states (such as Florida) to become a licensed and bonded contractor. It is a binding agreement that you will adhere to the building codes and state laws of the municipality that you’re working in. It’s also a term that many use interchangeably with a contractor’s bond or construction bond—so make sure you know exactly what is being required of you for the project you’re bidding on.
Where Can I Obtain a Construction Bond?
There are multiple companies that provide surety bonds for construction projects. If you are looking to bid on a federal project, connect with your agent—or reach out to one of ours—to ascertain exactly what bonds will be required. You want to be sure that your business and all subcontractors under your employ are protected.