What Is a Construction Bond?
Think of a contract surety bond, often called a construction or contract bond, as a three-way promise between you (the principal), Westfield (the surety), and the project owner (the obligee). The surety guarantees the obligee that the principal will fulfill its obligations as outlined within the written contract.
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What Is the Difference Between a Commercial and Contract Bond?
Contract and commercial bonds are the two main categories of surety bond issuance. The big difference between these bond types is the intended purpose. Contract bonds provide a financial guarantee for construction projects while commercial bonds can be found in almost any industry. Commercial bonds are needed for a wide range of reason.
How Are Surety Bonds Different From Insurance?
Although contract surety bonds and construction insurance are needed for similar reasons, there are several key differences outlined below.
| Contract Bonds | Insurance | |
|---|---|---|
| Protection | Contract bonds protect the project owner. | Insurance protects the policyholder (you or your business). |
| Claims Control | If default occurs, surety companies have a variety of solutions to meet the obligation. | Insurance companies have no control over the project. A claim is either approved and paid or denied. |
| Repayment Terms | The bond principal is financially responsible for approved claims. | The policyholder does not need to reimburse the insurance company. |
| Number of Involved Parties | Three: obligee, principal, and surety. | Two: policyholder and insurance company. |
Who Needs Contract Bonds?
There are many professionals that commonly need contract bonds, such as:
- General contractors and construction managers
- Mechanical and electrical trades
- Road and bridge builders
- Paving contractors
- Utility, water, and sewer line contractors
Why Your Business May Need a Contract Bond
Are you bidding on a government or publicly funded project? Then, you likely need a contract bond. In many instances, contract surety bonds are required by law. On the other hand, if you’re working with a private company, contract bonds are typically required to ensure financial responsibility and secure funding.
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Types of Contract Bonds
You may be wondering what types of bonds are used for construction. While there are many kinds of construction bonds, we’ve compiled a list of the most common ones below.
Performance Bond
A performance bond in construction guarantees the performance of the terms of a written contract. It protects the owner from financial loss should the contractor fail to perform the contract in accordance with its terms and conditions.
Payment Bond
A bond that ensures that the contractor will pay specified subcontractors, laborers, and materials suppliers associated with the project.
Maintenance Bond
A bond that offers protection in the event of faulty or defective materials, even after a project’s completion for a specified time period (similar to a warranty).
Bid Bond
A bid bond in construction ensures that a bidder for a supply or construction contract will enter the contract within the stipulated timeframe if the company wins the bid.
Supply Bond
A bond that ensures a supplier will produce the supplies or materials specified in the contract. If the supplier were to default, the bond protects the purchaser from any losses.
