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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 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.
  • Performance Bond - These bonds provide the guarantee that the contracted construction project will reach completion while meeting the terms specified in the contract.
  • Payment Bond - These bonds hold contractors accountable for paying any subcontractors or materials suppliers they work with through the duration of the project.

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 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.

How does a Construction Bond Benefit the Obligee?

By giving them a 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.

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.

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 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.

Viking Bond Service - Nationwide Leader in Construction Bonds

Call us at 1-888-278-7389 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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