3 Types of Financial Guarantees for Construction Projects

Financial Guarantees

In the construction industry, contract bonds are a type of financial guarantee for the bills of the construction project. Also called construction bonds, these guarantees are backed by a bank or an insurance company for the completion of the project by the specified contractor. There are three primary construction bond types.

Bid Bonds

With a bid bond, the owner of the project is protected if the contractor does not honor the bid. The project owner is oblige on the bond, and oblige has the right to sue both the issuer of the bond and the principal in order to have the bond enforced.

Performance Bonds

A contractor will generally use a performance bond as a way to guarantee contract completion according to the terms laid out. If the contractor (or principal) defaults on the specified terms, the project owner may call upon the bank or insurance group (surety) to fill the contract. A new contractor might be brought in to finish the work.

Payment Bonds

Through this financial guarantee, all payments due to any subcontractors or suppliers on the part of the principal are covered. The owner is the real beneficiary of this bond type since it becomes a remedy for non-payment that doesn’t come from the owner’s pocket.

Bonds are a way to protect a contract and the financial expenses that accompany construction projects. They protect both the project owner and the contractor.