There are many different types of contract bonds, and even though they all share the same basic mechanics, each one works a little differently. In this blog post, we will run down the most common types of contract bonds and show you where to find more information about them all.
What is a Contract Bond?
A contract bond is basically a way to hold someone accountable when they violate the terms of a contract. When that happens, the other party in the contact may file a claim against the contract surety bond. As long as the claim is true – meaning the party at fault violated the contract as the claim asserts – the surety company that backs the bond pays to settle the claim. Under the terms of the bond agreement, the party that caused the claim by violating the contract has the final financial responsibility for all claims. Therefore, even if they have been unable or unwilling to pay for claims before, they must pay the surety back for any settlement. Contract bonds are a way to hold one party responsible for violating a contract and provide the other party a guaranteed way to seek damages.
What are the Different Types of Contract Bonds?
Contract bond is a blanket term used to describe many different types of bonds in construction contracts or other industries. Bond seekers commonly need multiple types of contact bonds at once, and need different packages of bonds throughout their career. Common types of contract bonds include:
- Bid Bonds – These bonds hold someone accountable if they win a bid to complete a construction project and then pull out of the project before it begins.
- Construction Bonds – This is another catchall term for a suite of contract bonds. Before starting a new project, contractors and construction companies often need to obtain all of these bonds: bid bonds, performance bonds, payment bonds, and (possibly) warranty maintenance bonds.
- Payment Bonds – If someone fails to pay their suppliers or third-party contractors, the injured parties can file a claim against this bond to recoup lost payment.
- Performance Bonds – When a contractor or construction company fails to meet performance standards mandated in a contract – to finish by a certain date, to keep costs below a specific threshold, to maintain precise quality standards etc. – these bonds allow the other party in the contact to seek damages.
- SBA Bond Guarantee Program – This isn’t a type of contract bond but rather a program from the Small Business Administration (SBA) that helps entrepreneurs secure bonds they couldn’t have otherwise.
- Subdivision Bond – Contractors hired to perform work inside of a subdivision may need one of these bonds, which hold contractors liable when their work falls short of expectations. A subdivision bond can also be called a developer bond, land improvement bond, or plant bond.
- Site Improvement Bond – Similar to a subdivision bond, a contractor may need a site improvement bond before performing work on an existing land site. The bond protects the site owner from a contractor’s faulty work.
- Supply Bond – Companies that supply goods and materials for construction projects may require this bond, which holds them responsible if a delivery of goods is not up to standards.
- Timber Sales Bond – If a company intends to clear lumber from public land, they will need a timber sales bond stating they will take responsibility if their actions step outside the boundaries of a contract.
- Warranty/Maintenance Bond – This bond applies to contractors and construction companies that agree to provide ongoing maintenance services or warranty protections. If they fail to deliver as promised, the other party may seek damages through the bond.
Who should get a Contract Bond?
Anyone required to do so according to the terms of a contract. When a contract requires a bond, the agreement isn’t final until the principal (the party required to get the bond) proves it has met the requirement. Different types of bonds in construction contracts can make or break a deal, so it’s crucial to comply with the bond requirement. As a nationwide surety brokerage issuing all types of contract bonds (including all the types outlined above), we can help you meet your bond requirements fast and in full.
How to Apply for Different Types of Contract Bonds?
In all cases, applicants must fill out a standard bond application, submit to a credit check, and supply a copy of the bond requirements specified in the contract – plus turn over any additional documentation the surety asks for. The surety will then quote a price for the bond, which the principal needs to pay to activate the bond.