How Do Bonds Work in Construction?

February 13, 2024

Construction bonds work to lower risk for project owners while providing financial incentives for general contractors to complete projects as outlined in their contract with the obligee. If a bonded contractor does not fulfill their contract, the project owner (obligee) can file a claim with the bond company to receive compensation from the bond amount.

Most large projects require contractors to obtain bid, performance, and maintenance bonds prior to submitting bids or commencing work on a project. These are also called contract construction bonds and are often required on public projects by city, state or federal governments as well as private developers.

A bid bond assures the project developer (also known as an obligee) that the bonded contractor who submits the lowest bid is financially capable of completing the project if awarded the contract. A performance bond guarantees that the contract will be completed as outlined by the obligee in accordance with the terms of the contract. A maintenance bond ensures that any materials or workmanship that are discovered to be flawed during a set duration after the completion of a contract will be repaired by the contractor.

If you are a general contractor that requires contract construction bonds to bid on or work on larger jobs, you should find a reputable bonding agency that offers competitive terms and has ample capacity to provide the type of bond you need at a competitive price. Choosing the wrong bonding agency could result in you exceeding your bonding capacity which can prevent you from being able to apply for the types of contracts you need or even get bonded at all.

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