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What is a Construction Bond?

Of all the many types of surety bonds, construction bonds are some of the most common. They're a feature of almost every construction project in the country. That's why it's so important to understand the details, especially as they apply to yourself and your business. What is a construction bond? Read on for a clear and comprehensive answer.

Construction Bond Definition

A construction surety bond is a contractual agreement between three parties: a contractor or construction company, someone who wants to hire them, and a surety bond company. The bond serves as a kind of guarantee that a contractor will complete the construction project within the parameters of the contract.

Types of Construction Bonds

The term construction bond actually applies to three different kinds of bonds, outlined below. Each has distinct details, but it's common for a construction company to need all three, and to obtain them all from the same bond provider at the same time. That's why they fall under the umbrella term of a construction bond.

  • Bid Bond - These bonds provide the obligee the affirmation that the construction contractor will be able to get the performance bond required if awarded the contract. Should a contractor win a bid and then fail to commit to the project, the project owner may file a claim against the bid bond seeking damages. Most large projects, especially those in the public sector, will involve bid bonds.
  • Performance Bond - These bonds provide the guarantee that the contracted construction project will reach completion while meeting the terms specified in the contract. If a contractor does not finish on time or meet other standards for quality, consistency, budget or other aspects of performance, the performance bond helps cover the losses.
  • Payment Bond - These bonds hold contractors accountable for paying any subcontractors or materials suppliers they work with through the duration of the project. Someone who hasn't been paid or paid in full may file a claim against the surety bond seeking the compensation owed.

These are the most common types of bonds to be called construction bonds. However, there are other surety bonds that contractors may be required to get over the course of a construction project. In all cases, those bonds help cover damages and losses resulting from contractors who do not meet various contractual obligations.

How Does a Construction Bond Work?

Regardless of the specific type of construction bond, the basic principle is the same. If the construction company that obtains the bond (known as the principal) doesn't adhere to the terms outlined in the contract, whoever employs that company (known as the obligee) may file a claim against the surety bond seeking damages. For example, if a contractor experiences a significant delay completing a stage of the construction project, the obligee may file a claim against the performance bond. As long as the claim is valid, the company that issues the bond (known as the surety) guarantees to step in to remedy the situation, whether through payment or other means. After doing that, the surety has the right to collect the amount expended in settling the claim from the principal. As the bonded party, a construction company has the responsibility to pay for any and all claims, whether to the obligee or the surety. By design, construction bonds guarantee that the injured party receives compensation for damages while also guaranteeing that the party responsible (the contractor) will be held financially liable.

What are the Parties Involved in a Construction Bond?

Any bond referred to as a construction bond will involve three separate yet equal parties:

  • Principal - The contractor is the principal. They are responsible for obtaining a bond, renewing it, and paying for any valid claims filed against it.
  • Obligee - The project owner is the obligee. They have the right to file a claim with the surety seeking compensation for damages caused by the principal.
  • Surety - The surety bond agency is the surety. They issue bonds to the principal and pay claims to the obligee. The principal must reimburse the surety for every dollar paid to the obligee, plus interest and fees.

How does a Construction Bond Benefit the Obligee?

By giving them the means to pursue justice and compensation in the event that someone they hire deviates from their contractual obligations. Bonds offer a way for anyone invested in construction projects to manage risk, by both incentivizing contractors to meet performance benchmarks, and also by requiring these contractors to pay if performance issues compromise a project.

How does a Construction Bond Benefit the Principal?

By helping obligees feel more confident about hiring, construction bonds indirectly benefit principles too. Without a surety bond to protect their interests, obligees would be much more hesitant about hiring. It would take longer to start construction projects, and there would be fewer overall. By holding construction companies accountable, surety bonds actually help them secure more work.

Who Can Get a Construction Bond?

Any construction contractor either bidding a contract or already awarded a contract. Construction contractors required to be bonded should find a bond company to work with sooner rather than later. Construction projects typically won't proceed without the necessary bonds in place. If a company can't or won't get those bonds, they will most likely be replaced. Therefore, it's important to act fast to ensure bonding doesn't become an issue.

Requirements for a Construction Bond

Every construction contract has different requirements. The obligee decides what those requirements are, including how large the construction bond must be and what benchmarks a contractor must meet. Avoiding claims means complying with those requirements to the letter. The approval requirements to obtain a construction bond is up to the surety backing it. Typically, a bond seeker will need to have an established business with a healthy financial track record. That being said, surety bond agencies vary in the amount of effort they will put forth to get as many of their clients approved as possible. Work with a team that's eager to get more people approved for the construction bond they need - Viking Bond Service!

How to Apply for a Construction Bond

Application requirements vary depending on the size of the bond, the nature of the project, and the surety company that issues the bond. For bonds under $250,000, applying typically involves submitting a quick form contract bond application, details about the bond requirements, and a credit check. Bonds larger than $250k will require a more in-depth application process.

Upon receiving the application materials, underwriters at the surety agency will work to evaluate the applicant's bond worthiness. Credit plays a big role. Applicants with good credit scores and no bankruptcies are considered less likely to conduct business in a way that causes claims, and more likely to pay the surety back for any claims it has to settle.

Underwriters calculate a different bond price for every applicant. In most cases, it's a small percentage of the bond's total value. The surety agency will quote a price for the construction surety bond premium. Paying that premium is the final step of the process. Once paid, the surety agency provides documentation proving someone has the bond required to finalize a construction contract.

Can You Get a Construction Bond With Bad Credit?

It's possible with certain surety partners but not all of them. Since applicant's with a low credit strength or blemishes on their financial record are considered a higher risk, and construction projects are naturally unpredictable, some surety bond companies reject all bad credit applicants. Viking Bond Service is different. We actually help applicants with credit issues get the bonds they require through a special program. We encourage everyone to learn more.

Why Choose Viking Bond Service

Contractors across the country make Viking Bond Service their preferred bond partner. They come back to us every time they need a bond. Why? Because we make the process fast, simple, and affordable. Bonds are an essential part of the construction industry, but they can also be considered an annoyance for any contractor who just wants to get to work. Count on us to make things easy - just as a true bond partner should.

Viking Bond Service - Nationwide Leader in Construction Bonds

Call us at 1-877-278-2564 to ask more questions, or use the contact form on this page. You can also request a free quote at your convenience. Count on Viking Bond Service to make the process easy from beginning to end.

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