Contract bonds are a type of surety bond that help guarantee that the terms of a contract are met. If a contractor does not adhere to the terms of the contract than the injured party can collect any financial losses incurred from the bonding company. It is an additional safeguard to ensure the principal performs all items in a written contract.
Types of Contractor Surety Bonds
A contract bond is often times synonymous with the following terms:
- Contractor Bond
- Construction Bond
- Bid Performance Bond
- Bid Bond
- Proposal Bond
- Payment Bonds
The two common types of contract bonds are bid bonds and performance or payment bonds.
Bid Bonds specifically protect the obligee from the Principal either backing off of the stated bid that has been accepted or submitting a low-ball bid and then not honoring the agreed upon price. Bid bonds are typically issued between 5-10% of the overall bid.
Performance Bonds will protect the obligee in areas of the contract like completing a job when agreed upon and under the agreed upon items. It guarantees that the contractor will perform the contract and pay for the labor and materials needed to complete the project. Payment bonds are typically issued at 100% of the contract amount.
A surety bond is an agreement that involves three of the following parties:
- The Principal– The party purchasing the bond that is being required to fulfill the terms of the agreement.
- The Obligee– The party that is usually requiring the bond and is reimbursed for financial losses due to the principal’s failure to fulfill the duties of the contract.
- The Surety– The party that is responsible for paying out the financial losses of the obligee due to the prin