Provides financial protection to the owner if a bidder is awarded a contract but fails to sign the contract or provide the required performance and payment bonds.

Bid bonds are common in the construction industry and elsewhere when using a bid-based process of selection. As a contractor bidding for a certain job, you’ll submit proof of a bid bond along with your proposal, as proof of financial backing required to start and complete the task, helping project owners identify low-risk contractors. The bond will be for a percentage of the entire bid amount. 

This bond serves as indemnity bonds and provide protection to all parties who enter an agreement after bidding, but specifically the project owner—also called an obligee. The obligee will have cover if the contractor—called the principal—doesn’t keep to his or her part of the agreement. For example, if the bidder retracts the bid, doesn’t start or doesn’t complete the project, the obligee has a guarantee of being compensated. Compensation will be for the difference between the current bid and the next bidder’s amount that will now have to be budgeted for. 

A government may also require a bid bond to ensure this category of bonds (contract bonds) come about in good faith. 

Provides an owner with a guarantee that, in the event of a contractor’s default, the surety will complete or cause to be completed the contract.

This is often a bond between a government entity and a contractor but it can also be used in private projects. It’s compulsory for federally funded contracts of $100 000 or more. It comes into play once a project owner accepts a certain contractor’s bid. Now the bid bond used for the bidding process is replaced by a performance bond. The bond serves as part of the guarantee that the entity awarded the bid will execute the project as stipulated in the bid according to contract guidelines.

With a performance bond in place there’s an assurance that a project, e.g. construction work happens according to the planned timeline. The work must also be on par with a specific standard. If not, a claim against this bond can lead to compensation for the project owner, providing the necessary funds for repairs or redoing the job. This minimizes losses and disruptions of projects. 

Ensures that certain subcontractors and suppliers will be paid for labor and materials incorporated into a construction contract.

This bond is often issued along with a performance bond and is how you as a contractor provides a guarantee that any subcontractor or suppliers of material will receive compensation. In the event of the contractor not paying these third parties, they can collect payments from the surety who issued the bond. This gives a project owner peace of mind that the project can run smoothly, with no chance of liens, even if a contractor goes bankrupt. 

In the case of the Federal Government, this type of bond is compulsory if a contract is worth more than $35 000. The bond must also cover 100% of the value of the contract. On a state level, there are different requirements for these bonds in different states, taking into account many factors, such as the size of the contract.

Guarantees the owner that any workmanship and material defects found in the original construction will be repaired during the warranty period.