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What are construction contract bonds?

Contract bonds ensure that a contract is fulfilled to its completion, specifically the completion of the construction project agreed upon between the principal, surety, and obligee.

  1. Principal: the contractor or individual/company purchasing the bond

  2. Obligee: the entity requiring the bond, like a project owner or government office

  3. Surety: the company that issues the bond to the principal; works with numerous surety companies to find construction professionals the best rate

The surety provides the guarantee to the obligee that the principal will carry out the terms of their contract. In the event the contractor fails to fulfill their duties in accordance with the terms of the bond, the affected project developer can make a claim on the bond up to its full amount to recover any financial losses.

Contract bonds are often known as construction bonds, as contract bonds are most commonly used in the construction industry on public projects. However, private project developers may also require contractors to file a surety bond before work on their project can begin.

Think you might need a contract bond?

Because there are many different types of contract bonds, there are many different reasons for which you may need a bond.

Because contract bonds are typically required before work on a project can be started, there are a few simple ways to determine if you need a bond. If you are going to submit a bid on a project, a bid bond will probably be required. If you win the bid, both a performance and payment bond may be required. However, to determine the exact bond amount you require, it is best to check with the obligee who requires the bond and to know the exact cost of the project you will undertake.

If you are looking to become a licensed contractor or are a contractor in need of a permit, license and permit contractor bonds are often required. With these bonds, their amounts are typically set by the obligee (government entity who requires the bond) and therefore you must check with them to verify the bond amount you require.

Other bonds still may be required if you plan to perform any work in public right of ways or for public projects.

How to get a contract bond

Once you have determined the bond you require and its amount, the next step is to submit a bond application to Some bonds can be issued instantly online for a set premium to all applicants regardless of financial and credit history, however some will require underwriting consideration. If your bond must be underwritten, a surety expert will examine your bond application, personal history, and business history to determine if and at what price a bond can be issued for.

Types of contract bonds in the construction industry

Bid Bonds

  • Bid bonds are required of a contractor when submitting a bid on a project to ensure the contractor’s financial backing and capabilities as a worker.

Performance Bonds

  • A performance bond is required to ensure that every project is completed according to the terms outlined in the agreed upon contract.

Payment Bonds

  • A payment bond is required of a contractor to protect all suppliers and subcontractors working under them to ensure proper payment.


  • Maintenance or warranty bonds protect construction project owners against defect or faults in the work being done on their project, including human error, materials, and the project design. The bond’s amount can be used to pay for any repairs necessary if the project is discovered to be defective following its completion.

Subdivision bonds

  • Subdivision bonds are required for improvements in a public space, including streets, curbs, sewers, and drainage systems. The bond guarantees the principal will finance and perform all construction, or else a claim can be made on the bond to complete the project.

Supply bonds

  • Supply bonds guarantee that supplies for a project will be provided as specified in the project’s contract. If the supplier fails to provide the agreed upon supplies, a claim on the bond can reimburse whoever must purchase the remaining supplies.

Site improvement bonds

  • Site improvement bonds are needed when renovations or improvements are needed for properties or structures. The bond guarantees that these renovations and/or improvements will be completed.