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A performance bond guarantees that a contractor will perform the work according to the conditions and requirements of the construction contract. These bonds protect the owner from financial loss as a result of a contractor default.

Performance bonds also protect the owner from substandard work, or work that doesn’t meet the contract requirements. They are usually required on public projects but are also sometimes required by owners on private projects as well.

The general contractor is typically the principal on a performance bond, with the owner as oblige. The project owner can make a claim against a performance bond if the work isn't being completed according to the contract requirements.

A payment bond protects the project owner from liens against the property by guaranteeing that the policyholder (typically the GC) will pay all subcontractors and suppliers for their work and materials. Payment bonds are required on most public projects, but are also frequently used on commercial jobs as well.

Payment bonds are designed to protect the owner, but they also extend benefits to subcontractors and suppliers. If the GC fails to make payment in a timely manner, subcontractors and suppliers can make a claim against the payment bond.

Bid Bonds

Bid bonds provide reassurance to a project owner that a contractor will follow through with their commitment to complete the job they are bidding on, and will provide a final bond backed by a surety company after the project award. The bid bond assures the project owner that the principal has the capability to complete the job as bid.

Like performance and payment bonds, these bonds are made out to the project owner and are provided by the general contractor as principal. If a claim needs to be made, the owner is responsible for notifying the surety company.

Maintenance or warranty bonds guarantee the project owner or a local jurisdiction that there will be no faults or defects in a certain improvement for a certain length of time. These bonds are often required when doing work on public infrastructure, such as sewer lines, storm pipes, or water mains.

If repair or replacement is needed within the time frame set by the jurisdiction and the contractor does not complete the work, then the jurisdiction will file a claim with the bonding company for any expenses they incurred.

A mechanics lien bond is used after a contractor or supplier has filed a mechanics lien on the property. They may also be called lien release bonds or discharge of mechanics lien bonds. They are used in the process of bonding off a mechanics lien. A mechanics lien bond removes the mechanics lien claim from the property itself, and attaches it to the bond instead.

Subdivision bonds guarantee that a developer or contractor will make improvements to the land in a subdivision as per its agreement with the local jurisdiction. Improvements can include things like sidewalk maintenance, electrical upgrades, or grading changes.

The jurisdiction sets the bond amount and how soon the work needs to be completed. If a claim needs to be made, the jurisdiction would be the one filing a claim.

Supply bonds ensure that building supplies or materials will be provided to a project. The supplier provides this bond to the GC or owner, and it protects them from default by the supplier. These types of bonds are often required on public projects, or on very large projects that require large amounts of materials.

Completion bonds provide assurance for the project owner that the project will be completed on-time, within budget, and free of liens. They differ from performance bonds because they cover the completion of the project as a whole, not just a specific contract. Both completion and performance bonds can be required on the same project. The project owner is responsible for making a claim if the project is not completed correctly.

Retention bonds replace the withholding of retainage on a construction project during the project or after completion, guaranteeing that all work will be completed at the end of the project. For example, a subcontractor may be able to offer a retention bond to the general contractor in exchange for a payout of the retained funds. A retention bond can enable a contractor to get their full progress payment in each period, without having to wait for retainage after the project is complete.

Depending on the cost of the bond, it may be a significant savings for a contractor over the life of a project. The project owner is responsible for making any claims for work that wasn’t completed.