Construction Bonds

What are construction bonds?

A contract bond in construction is called a construction bond. This type of bond is required for general contractors, subcontractors, tech companies, and any company working on a project where a bond is outlined in the contract. Issued on a project-by-project basis, construction bonds ensure contracts are fulfilled.

How do construction bonds work?

Before entering a public works project, a contractor will purchase the required contract bond or bonds through a bonding company and submit them to the project owner.

There are three entities involved in construction surety bonds:

  • The principal (the contractor purchasing the bond)
  • The obligee (the project owner requiring the bond)
  • The surety (the bonding company issuing the bond)

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What are the most common types of construction bonds?

Construction bonds include three main bonds: bid bonds, performance bonds, and payment bonds.

Bid Bonds

A bid bond is the first contract bond required for public works projects. Before a contractor submits a bid for a project, they must purchase a bid bond and submit it to the project owner, along with their bid.

Bid bonds guarantee financial compensation for project owners. If a contractor abandons a project or fails to uphold their bid, the project owner can receive compensation to re-bid the project by filing a claim against the bond.

Check out our Credit Only bonds if you need coverage under $750,000.

Performance Bonds

Once a contractor is awarded a project, they will require a performance bond. A performance bond ensures that a contractor will complete the project per the project’s contract.

This bond also guarantees financial compensation for the project owner. If a contractor fails to complete their job, the project owner can appeal to receive compensation by filing a claim against the bond. If the claim is awarded, the surety will compensate the project owner for the contractor’s failure to perform. However, it is important to note that the contractor is liable to pay back the full claim amount, plus additional expenses, to the surety.

Check out our Credit Only bonds if you need coverage under $750,000.

Payment Bonds

A payment bond, which is also referred to as a labor and material payment bond, is necessary for state or federal construction projects. It protects subcontractors, vendors, and suppliers involved in a project by guaranteeing financial compensation.

If a contractor fails to pay the parties involved, a claim can be made against their bond. If a claim is upheld, the surety issuing the bond will cover the claim amount. However, the contractor may be responsible for paying the claim amount back to the surety.

Payment and performance bonds are closely related, as they are usually both required to protect the work of a project.

Check out our Credit Only bonds if you need coverage under $750,000.

How much do construction bonds cost?

The premium for a construction bond can range from 1% to 3% of the total bond amount.

The surety company will take your credit score, financial strength, and project details into account.

How can I get a construction bond?

To get a construction bond, you must provide the following to your bonding company:

  1. Completed contract questionnaire.
  2. Bank inquiry form to verify business cash and bank lines.
  3. Year-end statements for the last three fiscal years of business, accompanying a current work-in-progress project schedule (including projects in progress and revenue yet to be collected).
  4. Last three years of corporate tax returns.
  5. Accounts receivable and accounts payable aging reports.
  6. Personal financial statement of all owners with 10% or more ownership (including verification, such as bank/brokerage statements, of any liquid assets).
  7. Bond request form and the Request for Proposal (RFP) for bid or contract/subcontract final bonds.

Get a free quote for a contract bond with NNA Surety at 855-215-2160.

What else should I know about construction bonds?

There are various contract bonds in addition to those mentioned above, for example, subdivision bonds.

Subdivision Bonds

A subdivision bond, also called a land/site improvement bond or plat bond, is purchased by developers performing government-required site improvements to land.

This bond removes financial burden from the city by guaranteeing a developer will fund site improvements and ensures they complete improvements per developer contract, city codes, and specified time frame.

For more information on subdivision bonds and to get a free quote, contact NNA Surety at 855-215-2160.

Questions? Call NNA Surety Bonds at 855-215-2160
Monday to Friday, 6 a.m. to 5 p.m. (PT)