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Contract Surety Bonds and its types

  • A contract surety bond is generally used to guarantee the performance of the contractor who is here considered as the principal for a construction contract. The contract surety bond protects the obligee that is the owner of the project from the failure of the contractor of finishing the specified work and from harmful business practices.

    The different type of contract surety bonds:

    • Maintenance Bond: Here, the typical terms range from one to two years. The maintenance bond protects the project owners from defective artistry or faulty materials on the construction project.
    • Payment Bond: This type of bond is generally required in most commercial and federal construction projects. Payment bond guarantees that the contractor will pay its laborers, subcontractors, and material suppliers as it is specifically mentioned in the contract.
    • Performance Bond: These bonds are many a time typically combined with bid bonds. A performance bond protects a project owner or we can also say an obligee when a contractor fails to adhere to the terms and conditions mentioned in the contract or fail to complete the project as required by the obligee.
    • Bid Bond: Bid bond guarantee that a contractor can meet the specification as it is mentioned in the bit it submits and will not back out of a bit that it has won.

    Let us look into what is Payment Bond:
    This type of bond is generally required on many construction projects. Along with a performance bond, a payment bond is usually issued in construction industry. A payment bond is generally very rarely requested, so they are usually billed at about 50% of any regular premium. Payment Bond forms a three-way contract between the contractor, the surety, and the owner to make sure that all the laborers, subcontractors, and material suppliers will be paid as it has been mentioned on the contract.

    Terms of Payment Bond:
    The surety is generally the company licensed by the regulatory agencies and the insurance department to write the bond within the state of the country where the work will be executed. The principal or we can also call the contractor, promise in the payment bond that the contract will be executed as per the specified terms and conditions. The Surety promises that if the principal or the contractor fails on his payment, the surety will make the payment for all the damages caused to all the demanding parties.

    On a private project, the payment bond can also become a substitute for a mechanic’s lien. Now mechanic’s lien means that it is an extraordinary remedy for all subcontractors, contractors, and all others who are related to the construction industry to resolve the payment related issue or problem arising out of it. When the contractor or the principal fails to pay the subcontractors and the suppliers, then, in that case, they might collect the payment from the surety under the payment bond.

    Mechanic Lien is also a type of bond. However, it cannot be used against public property, so that is the reason why this type of bond is popular and is being required in government-funded projects. This bond is perhaps the only option that some subcontractors or suppliers have so that they get paid for the services and labor that they give.

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