4 Things You Should Know About Construction Bonds

Photo by Ralph (Ravi) Kayden on Unsplash

Construction bonds are a type of bond that is used in construction projects. They are a type of surety bond used to protect the owner, the general contractor, and the subcontractors. These bonds define the project’s risks and help protect you, the investor, from losses in case of a fire or some other unforeseen event. However, these bonds are not always required, and not all buildings are required to have them. So what is a construction bond, how do they work, and what do you need to know about them? This post will discuss four important aspects that anyone who uses them needs to know.

What Are Construction Bonds?

Essentially, construction bonds are issuances intended to guarantee the completion of a construction project on time and within agreed specifications. Besides helping to secure financing, they can also be used to secure insurance coverage for the project. These are typically issued by government agencies or private companies involved in the construction industry. 

Usually, these bonds are backed by an asset, such as property or equipment. At their core, they exist to provide bondholders financial security and protect those who have hired them. It is not necessary to have construction bonds in every case, but they are helpful in some cases. A construction bond can be beneficial if an emergency occurs, such as an accident or a natural disaster. For instance, you could use your bond to cover any damages (such as replacing materials) if there was a fire during construction.

What You Should Know About These Bonds

Construction bonds are probably familiar to anyone who has worked in the construction industry for some time. However, most of the general public does not know what they are or why they exist. 

Different Types Of Bonds Exist

There is a whole class of surety bonds referred to as construction bonds. Several types of bonds are included in this class, each involving different kinds of risk. Surety companies offer several main types of bonds for the construction industry.

Bid Bond

A bid bond is a performance bond that promises to pay for work done on a project. The bid bond ensures that the contractor will complete the job and pay for any damages or other costs that result from it. 

Performance Bond

Construction projects often use performance bonds to ensure that the work will be completed on time and within budget. Performance bonds guarantee that all parties involved in a project will meet their responsibilities even if one does not.

Payment Bond

Builders can use construction payment bonds as insurance to cover unexpected costs. Construction companies usually issue bonds before they begin the construction phase. They cover the costs of materials and labor if the unexpected occurs and they cannot meet payment obligations.

License Bond

Construction license bonds are intended to protect the public against damage or loss during construction. The bonding company will cover all costs associated with construction-related injuries and provide total compensation for the general public.

To Get One, You Might Need Good Credit

Whether you can be bonded and at what rate is heavily influenced by your personal credit. Small projects ($350,000 and under) are especially susceptible to this, as your eligibility and interest rate are determined solely by your credit history. While your credit is still essential for larger projects, the financial position of your company and how long it has been in business will play a more significant role.

They Are More Common For Larger Projects

Construction bonds are more common for projects with a high value or a broader scope. They’re essential because they protect the owner against financial losses and provide them with peace of mind, which can be vital for high-value projects. Smaller projects do not necessarily need construction bonds, but it is recommended to obtain one if your project is more extensive or worth over $1 million.

They Are Required In Some States, But Not In Others

The guarantee provided by a contractor license bond increases the chances of better jobs for contractors who are appropriately licensed and bonded. Contractors should consider getting a license bond once those benefits are weighed against. In some states, you are required to have construction bonds to obtain a building permit. Depending on where you live and what you plan to do, you may need to meet specific legal requirements.

As you can see, construction bonds are one of the most widely used forms of financing in the construction industry. They’re used both as a way to finance construction projects and as a way to ensure that the builder will finish the project on time.

About the author


Mike K. Watson

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