What Are the Three Types of Bonds That Can Be Required from a Contractor?

Mar 21 2024      On Behalf of  David M. Duree & Associates, P.C.      Blog

Construction projects are often extraordinarily costly jobs. As such, all parties require tangible assurance that everyone will operate in good faith. In the construction industry, the contract that creates a legal relationship between the owner of a project and a contractor is known as a “bond.” In the language of bonds, the issuer of a bond (the party guaranteeing payment) is called the “surety,” the contractor is the “principal,” and the project owner is the ”oblige.”

When these parties enter into a bond, they have specific obligations to fulfill. An experienced Missouri construction law attorney can make sure that you understand the terms of your bond, reducing your chances of incurring any legal or financial liability. The most common types of bonds are as follows.

Bid Bonds

A bid bond is a kind of surety bond that gives assurance to the project owner that the winning bidder will furnish the required performance and payment bonds. If the contractor fails to do so, the bid bond will be used to cover any costs incurred by the owner in re-bidding the project. Bid bonds are typically required for public construction projects and large private projects to discourage non-serious bidders.

Performance Bonds

A performance bond is a kind of surety bond that comes into play if the contractor fails to perform the work specified in the contract. The performance bond protects the project owner from financial loss. If the contractor defaults or is terminated for cause, the surety will step in to ensure that the project is completed, either by arranging for another contractor to complete the work or by providing financial compensation to the owner. Performance bonds require the contractor to perform their obligations under the contract.

Payment Bonds

A payment bond is a kind of surety bond that protects subcontractors, laborers, and material suppliers who have not been paid by the contractor for work performed or materials supplied on the project. Should the contractor fail to make these payments, the unpaid parties can make a claim against the payment bond for the amounts owed. 

Payment bonds help ensure that those contributing to the project are adequately compensated, even if the contractor faces financial difficulties.

Contact a Missouri Construction Attorney Today

These three types of bonds – bid bonds, performance bonds, and payment bonds – are essential risk management tools in the construction industry, serving to protect the interests of project owners, contractors, and subcontractors alike. Failure to comply with these bonds can result in significant financial and legal consequences.

Whether you are a contractor or a project owner, consulting with a dedicated construction bond attorney is essential before entering into any agreement. At David M. Duree and Associates, P.C., our 40 years of litigation experience can help you achieve clarity, resolution, and compliance as you embark on your next project. Call us today at 1 (618) 628-0186 or contact us online for a confidential consultation to learn more about how we can help you.