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October 20, 2022

What is a Construction Bond?

A bond in contracting is meant to guarantee that the terms of a contract will be fulfilled. It’s a type of surety bond that protects the contract “owner” from financial losses in case the contracted “party” fails to fulfill their duties accordingly.

It also protects an investor against liabilities arising from interruptions or accidents during a construction project. Every construction project needs them to allow for the success of their business and protect them against financial loss.

But how does it work?

Below, we dive into the details of the most common types of surety bonds.

A contractor and an employer overseeing construction processes

How Does A Construction Bond Work?

A contractor license bond is also known as a construction bond. Every construction project requires this type of bond to assure the project owners. These construction bonds also have two important parts in larger projects:

  1. To protect the owners against job incompletion; and
  2. To protect the contractors or construction companies against nonpayment of materials from suppliers or labour.

Construction bonds usually involve a contractual agreement between three parties:

  • Contractor or a construction company;
  • The employer (or the person who wants to hire them); and
  • A surety bond company. 

The employer is usually the project owner, investor, or government agency that enlists a construction company to get the job done. Then, the contractor or construction company will bid on the project with a bond—the one with the lowest bid price will win.  

For the employer, putting up a bond will reduce the chances of financial liabilities. Once that bond is submitted, a principal—who is the one managing the construction work—essentially promises that they can complete the job according to the stipulations of the contract bond. The principal also assures the employer that they have the means to manage the project and to finish it with the highest quality specified in the contractual policy.

The surety bond company will then run extensive background checks on the contractor before approving the bond.

Special Cases

In special cases, when a contractor fails to abide by the stipulations of the bond, both the surety and the contractor or construction company will be held liable for damages. This is because the owner has the power to make a claim against the contractor for the financial losses they incurred once the contractor fails to deliver their duties.

If the contractor declares bankruptcy, the surety company will be held responsible since they didn’t run a thorough background check on the contractor.

How Does A Construction Bond Benefit An Employer?

A construction bond helps employers by protecting them from financial losses in case their projects go awry. The construction bond offers benchmarks to gauge the performance of contractors during the project. If they fail to meet those benchmarks or fail to fulfill their duties, they will be held responsible for the ensuing liabilities.

How Does It Benefit A Contractor?

Having a construction bond in place helps contractors and construction companies get more work. Because a construction bond is an assurance that a project will be completed and that their interests are always protected, employers have more trust when it comes to hiring contractors or companies. 

What Are The Requirements For Construction Bonds?

For companies that want to purchase construction bonds, follow the steps below:

  1. Thoroughly review job requirements to determine if a construction or contract bond is needed.
  2. Secure a bid bond from a surety agent and submit it together with a proposal.
  3. Once the contract is won or awarded, the agent will provide a performance bond.
  4. Once the job is completed, a maintenance bond may be required in some cases.

What Are The Types of Construction Bonds?

1. Bid Bond

A bid bond is submitted by contractors along with their bid proposals to win a contract with the employer.

These types of bonds provide the employers with assurance that the contractor will provide them with a performance bond once they are awarded the project. Without a performance bid, the contractor will not be able to start working on the project. A bid bond also protects employers in the event of a contractor backing out once they win the bid. 

2. Performance Bond

A performance bond replaces the bid bond once the contractor starts to work on the project. This type of bond protects the employer from financial losses if the contractor or construction company cannot fulfill the duties according to the contract’s policies.

3. Payment Bond

This is a type of bond that guarantees the employers that the contractor has the financial capability to see the project to its completion. This is also called a labour and material payment bond.

Two people shaking hands after agreeing on a construction bond

Top-Notch Services You Can Always Count On

Contractors Insurance is an award-winning commercial insurance brokerage firm based in Ontario. We specialize in insurance bundles tailor-fit to your business’s needs, and this includes construction bonds.

We are always committed to providing the best possible service to our clients. Our team provides the utmost transparency when it comes to designing your insurance plan. With our team of experts, you can rest assured that you will be well-informed on all the details, from your policy’s limits and exclusions to its unique features and other benefits.

To learn more, don’t hesitate to contact us today


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