Finance

CONSTRUCTION BOND: MEANING, HOW IT WORKS, REQUIREMENTS, AND TYPES

Justice Brekke June 30, 2025
  1. INTRODUCTION

A construction bond is a type of surety bond used in building and construction projects. Construction Bonds protect project owners or investors from financial losses if the contractor fails to complete the project or doesn’t follow the agreed terms. This bond helps ensure that the project’s expenses are covered even if things go wrong.

  1. WHAT IS A CONSTRUCTION BOND?

A construction bond is a formal pledge made by the contractor to finish the project in accordance with the terms of the contract. If the contractor does not do the job properly or on time, the bond can cover the financial losses. This provides project owners with peace of mind. 

  1. HOW IT WORKS?

Construction bonds are often required for government or public construction projects. Contractors who want to bid on such projects must provide a construction bond. This gives the project owner confidence that the contractor can complete the task as agreed upon and is financially secure. 

Large projects may need two types of bonds:

  • One to cover incomplete work.
  • One to cover non-payment to workers or material suppliers.

Three parties are involved in a construction bond:

  • Obligee – The project owner or investor (usually a government agency).
  • Principal – The contractor doing the work.
  • Surety – The company that provides the bond.

The obligee asks contractors to get a bond to reduce financial risks. Usually, the contractor with the lowest price is chosen. By getting a construction bond, the contractor promises they can finish the work as per the contract.

The surety business investigates the contractor’s finances and background before granting a bond. Both the contractor and the surety bear responsibility if the contractor violates the terms of the contract. To recoup monetary losses, the project owner may submit a claim. If the surety pays the claim, it can later demand repayment from the contractor.

  1. REQUIREMENTS FOR GETTING A CONSTRUCTION BOND

Here are the usual steps to get a construction bond:

  • Review if the job needs a bond.
  • Obtain and include a bid bond with the project proposal. 
  • If selected, get a performance bond.
  • Complete the work.
  • If required, get a maintenance bond for future repairs.

Some projects are not eligible for bonds, such as:

  • Work outside the U.S.
  • Jobs on Indian reserves.
  • Long-term or multi-year construction projects.
  • Private home remodeling.

These projects are considered risky by most U.S. surety companies due to legal or financial uncertainties.

  1. TYPES OF CONSTRUCTION BOND
  • Bid Bond – guarantees that, should the contractor be chosen, they will accept the project and get a performance bond. 
  • Performance Bond – shields the project owner from subpar or unfinished work. 
  • Payment Bond – assurances that suppliers, employees, and subcontractors will be paid by the contractor. 

In summary, construction bonds play a key role in ensuring that construction projects are completed properly and that all parties involved are financially protected.