Contract Bonds

Commonly needed for contractors, construction companies, commercial     landscapers, food services, manufacturers and wholesalers 

Contract bonds are exactly what they sound like. They back up a promise (through a contract) between two parties. They’re designed to compensate the obligee if the principal fails to do their job.

While Contract surety bonds can be used in any industry, they’re most common in the construction industry, partly because they’re required on a state level for any project over a certain amount. There’s also a federal act (the Miller Act), that requires a contract bond for any construction project worth more than $100,000.

There are three main types of Contract bonds: Bid Bonds, Performance Bonds, and Payment Bonds. 

A Bid Bond guarantees that the entity making a bid on a project will enter into a contract should they win the bid.

A Performance Bond guarantees that a business or individual completes the project they’ve agreed to do in accordance with any specifications in the contract.

A Payment Bond guarantees that the business or individual doing the project will also be the entity to pay any suppliers, subcontractors or other parties whose services are being used to complete the project.

Let's look at this example with a construction company. With a large project, like a multi-building apartment complex, a construction company may very well have to take out all three types of contract bonds to: 

• Ensure it takes the job if its bid is accepted,
• Finishes the job in the manner and up to the standards that have been dictated, and
•  Pays all subcontractors and suppliers that were involved in completing the project.