Contract Bonds

What is a contract bond?

A contract bond is a surety bond unique to the construction industry, such as a bid bond or a payment and performance bond. Typically, these bonds are required as part of the contract between the general contractor and the project owner.

When do you need a contract bond?

Specifically, bid bonds are required when you submit your bid at the start of the bidding process for a project. Payment and performance bonds are often required once you are awarded the contract.

How does a contract bond work?

A contract bond ensures that the contractor will fulfill their obligations to the project owner as outlined by the contract. If the contractor fails to do so, the surety company will step in to ensure the project is completed per the contract. If the project owner suffers losses, they can recover damages from the surety via a claim on the contractor’s bond. However, the contractor is liable for reimbursing the surety for any claims paid out, plus additional fees and expenses incurred by the surety. Failure to reimburse the surety can harm the contractor’s ability to obtain bonds in the future, financial well-being, and reputation.

For example, suppose a general contractor has a performance bond and they fail to complete the project due to a breach of contract. In that case, the surety company will work closely with the project owner to ensure the project is completed, for instance, by providing a qualified and trusted replacement contractor.

How to get a contract bond.

One of the most important steps when getting your contract bond is to start the process early. Don’t wait until the day before a bid to apply for your bid bond or wait until the contract is awarded to request your performance and payment bonds. Surety underwriting takes time and requires timely and accurate information. Be sure to provide your surety agent with accurate and honest information.

What is an indemnity agreement?

An indemnity, or indemnity agreement, is a contract between the principal on the bond and the surety company that states the principal promises to reimburse the surety if the surety must pay out money due to a bond claim.