What is a completion bond?
A completion bond guarantees a project owner or lender financial compensation if a contractor or lendee fails to complete a project. Also called a “completion guarantee,” this contract bond ensures that a project will be finished on time and within budget. Completion bonds are common in the construction, entertainment (video game or film production), and real estate industries.
Quick Takeaways
- A completion bond guarantees a project owner or lender financial compensation if a contractor or lendee fails to complete a project.
- Completion bonds are common in the construction, entertainment, and real estate industries.
- Your bank, investor, or other financial institution may require the bond before financing your next project.
- Performance bonds ensure contractors fulfill their individual contracts, while completion bonds ensure contractors finish entire projects even if they do not get paid for it.
How do completion bonds work?
You may need a completion bond if you’re a real estate developer, construction contractor, or movie producer. The city, county, or state may require this bond even if they are not financing the project. A private project owner may also require this bond before doing business with contractors.
Completion bonds are three-party contracts. Let’s say you’re a real estate developer working on land that also includes some public improvements. The public entity may require a bond on the work to ensure the improvements get done, even though they aren’t involved in the project financing. That way, they’re guaranteed the project is completed as agreed.
- In this case, the obligee would be the public entity.
- You – the developer – would be the principal in the surety contract.
- The third party in the agreement is the surety, which issues your bond and backs it financially.
If the principal fails to complete the project, breaking the surety agreement, the obligee can file a claim for any losses they suffer. The surety may step in to settle the claim, covering the costs upfront for the principal. However, the surety will hold the principal liable and expect full repayment.
What are some examples of completion bonds?
1. Construction Projects
A public entity may require a project owner to post a completion bond before letting them complete public improvements on a new development. Some construction projects can take months or even years to complete. A completion bond ensures that this work will be completed.
2. Movie Production
Completion bonds are common in the entertainment industry. A large film project, for example, can take years to finish. With numerous variables involved, a financial institution may require a completion bond to protect its assets at the start of the project. In signing the bond agreement, the producer promises full loan repayment once the project is complete.
3. Other Projects
Real estate developers may need to secure completion bonds before getting the financing they need to complete upcoming projects. Completion bonds are also common in the video game industry and mortgage financing deals.
Completion bonds are often confused with performance bonds. While they’re similar in some cases, they aren’t the same. Performance bonds ensure contractors fulfill their individual contracts, while completion bonds ensure contractors finish projects even if they aren’t paying for them. Therefore, a completion bond is more comprehensive and provides more coverage.
A job may require a single completion bond and multiple performance bonds, depending on the parties involved throughout the project.
The cost of completion bonding will vary depending on your project’s size and scope and your credit score, business financials, and experience. If you’re well qualified, you could pay as little as 2-3% of the bond amount required. It’s a higher-risk bond, so your underwriter will carefully examine your business credentials and project specifications before approving your application.
Get a Completion Bond for Your Next Project
To get approved for a bid bond, you must pass the bond underwriting process. This process may involve filling out a form, signing the bond, delivering it to the party requiring it, and paying your premium. Start the process online today, and we’ll help walk you through each step toward obtaining your bond as quickly as possible. Contact us anytime with questions along the way.
About ZipBonds.com
Founders Ryan Swalve and Zach Mefferd formed the vision for ZipBonds.com when they realized how overly complicated it was to help clients place surety. The frustration of being unable to incorporate the technology they’d used in other insurance-focused projects left them thinking “there has to be a better way.”
Fast forward a couple of years, and that better way is the impetus of everything we do at ZipBonds. We constantly look for innovative ways to improve the bonding process for our clients and agents. Our team comprises individuals who understand all angles of surety – for companies, agencies, and individuals. Incorporating everyone’s point of view to improve the process while simultaneously integrating cutting-edge technology is what sets our business apart.