Digging into Construction Bonds: A Complete Guide

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What are construction bonds?

A construction bond, also called a contract bond, is a type of surety bond that investors, owners, or public entities use for an extra layer of protection in construction projects. In short, these bonds act as insurance for clients – protecting them in case of contractor default (work is not completed per the contract).

Every surety bond is a legally binding contract between three parties. In this case, the three parties are:

A construction bond guarantees that a contractor performs the work according to the project’s specifications. The bond protects the owner financially, so they aren’t left high and dry if the contractor fails to finish the job or does shoddy work. It also protects the project owner against project disruptions and cash flow problems.

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How do construction bonds work?

  • 1.  A project owner lists a job.
  • 2.  The project owner requires any contractors who are bidding the job to put up a bid bond.
  • 3.  The project owner selects a contractor (usually the one with the lowest bid) to take the project.
  • 4.  The contractor agrees to complete the work according to the contract. They must be able to manage the project financially and perform the job to the quality specified in the agreement, avoiding contractor default. They do this by putting up a performance and payment bond.
  • 5.  The contractor either fulfills the policy terms or is held liable (along with the surety company).

Why do contractors need construction bonds?

Contractors must obtain various types of construction bonds for government or public works projects and many private-enterprise construction jobs. A bond reassures the project owner that they’re in good hands as the contractor commits to perform the job according to the project agreement. In a nutshell, a construction bond reduces the risk of financial loss for the project owner (in case of contractor default).

Bond Requirements for Construction Projects

You can follow this process to obtain a contract bond:

ZipBonds provides thousands of bond options, including construction bonds.

Types of Construction Bonds

Here are the main types of construction surety bonds:

How much do contract bonds cost?

The cost will vary based on the type of construction bond, the amount of coverage, your credit history, experience on similar jobs, your financial history. Generally, surety bonds can cost anywhere from 1% to 3% of the total bond amount. For example, if you require a $50,000 bond policy, you could pay anywhere from $500 – $1,500.

Frequently Asked Questions

Can you get a contract bond with bad credit?

You may still be able to get the bonds you need if you have bad credit, but your premium may be higher. Your credit score will play a role in how much a surety will charge you for a construction bond. Working with a direct surety provider like ZipBonds will give you access to a larger pool of sureties to help you find an affordable solution.

Someone may file a claim on your bond while the bond is active, and then the surety will begin an investigation to determine the claim’s validity. If invalid, no further action will be taken. If valid, typically the surety and the contractor will come to a solution to resolve the issue. The surety will settle the claim, then you’ll be indebted to them until you pay them back.

  • Identify which contract bond you need and the coverage amount.
  • Contact a surety bond provider to apply for your bond. You may need financial statements, references from a bank and previous project owners, and a work-in-process schedule.
  • Get a quote to determine the cost of your contract bond. It may cost anywhere from 1–3% or more of the total bond amount.
  • Approve a quote and pay the premium amount.
  • Your surety provider will send you the bond.
  • Double-check that all the information is correct and error-free. If there’s an error, contact your surety to fix it immediately.
  • File your bond with the project owner (or whoever requires the bond).

Get a Construction Bond in Your State

Apply online and complete the bonding process in minutes. ZipBonds makes it fast, easy, and completely painless. If you have any questions along the way, give us a call at (888) 435-4191.

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