What Are the Different Types of Construction Bonds?

If your construction company aims to work on government or public works projects, you’ll likely be required to obtain a construction bond. These bonds are an important part of large projects, protecting project owners against financial damages if your company is unable to hold up its contractual obligations.

Sometimes referred to as contract bonds or surety bonds, the function of these bonds is to provide project owners with a guarantee that the project will be completed. You might think of them as a form of insurance on a large-scale construction project. As the company contracted to do the work, you must obtain a construction bond from a surety company.

If you’re new to the world of bonding, navigating the construction bonding process and the different types of construction bonds can be challenging. There are a variety of bonds, each with different use cases and requirements for construction companies to be aware of.

In this guide, we explore the main types of construction bonds your company may be required to obtain before starting work on government or public works projects.

The Main Types of Construction Bonds

Construction bonds are provided by surety companies, specialized organizations that underwrite construction projects. They offer several types of construction bonds, each with different use cases.

The main categories of construction bonds are:

• Bid bonds
• Performance bonds
• Payment bonds
• Maintenance bonds
• Supply bonds
• Subdivision bonds
• Site improvement bonds

Bid, performance and payment bonds are by far the most common of these. Let’s take a closer look at each of these bond type and explore how it’s typically used in large construction projects.

Bid Bond

Bid bonds are used during the project proposal phase. They essentially serve as an indication that a construction company has the bonding capacity to carry out the proposed work. They protect the project owner from contractors who renege on their proposal once they’re awarded the project or who are unable to obtain a performance bond.

Obtaining a bid bond shows that your construction company is serious about its proposal. Some projects require all bidders to submit a bid bond with their project proposal. Once a construction company has been awarded the contract, it typically obtains a performance bond from the same surety.

Performance Bond

After they’ve been awarded a government or public works project, construction companies usually must post a performance bond. This bond serves as a guarantee that the work will be completed in accordance with the terms of the contract. In the event a construction company is not able to fulfill the contract, the surety will step in to assist them. In the worst-case scenario, the surety will replace them with alternative contractors.

During the construction project, the surety will frequently check in on the progress of work to ensure the project is progressing as planned. The construction company’s work in progress (WIP) schedule provides this information and should be updated and shared with the surety regularly.

Payment Bond

In some instances, companies may be required to obtain a payment bond in addition to the performance bond. Payment bonds (also called labor and material payment bonds) guarantee that all subcontractors and materials suppliers will be paid. This ensures the owner of the project will not have a lien placed on their property if the general contractor goes bankrupt and can’t fulfill its financial commitments.

Other Types of Construction Bonds

The three bonds described above are the most common types of construction bonds. But there are several other types a construction company may have to obtain, depending on the characteristics of each project.

Additional types of construction bonds for company owners to be aware of include:

• Maintenance Bonds: Also known as warranty bonds, these bonds guarantee that the work completed on a project is free from defects in workmanship or materials. Maintenance bonds remain in place for a limited period of time after the completion of a project. If defects are found during this period, project owners may make a claim to cover the costs of repairs.
• Supply Bonds: These bonds hold suppliers accountable for providing the construction materials and equipment required to complete the project. If supplies specified in a purchase order aren’t provided, the bond covers the difference, protecting the customer from financial damages.
• Subdivision Bonds: Public works projects often require construction companies to build civic structures such as sidewalks and roadways. A subdivision bond ensures that the construction of these structures is completed in line with all relevant specifications and construction codes mandated by the local municipality.
• Site Improvement Bonds: These types of bonds are only used in renovation projects, not new construction. They ensure that the renovations are completed to the specifications put in place by local municipalities.

James Moore: Renowned Construction CPA in Florida and the Southeast

Understanding the various construction bonds is important for construction companies with aspirations of bidding on government and public works contracts. Virtually all construction work of this type is required to be bonded. Knowing which type of bond you need, and what it’s used for, is key to your success.

Developing a working knowledge of these construction bonds is one thing; getting approved for a construction bond is quite another. Remember, a construction bond is essentially a guarantee that a surety makes on your behalf that your construction work will be completed on time, on budget, and on spec. Ensuring that the surety feels comfortable making that guarantee can be a significant undertaking.

A major component of developing the capacity to do bonded work is strengthening the internal financial infrastructure of your company. To obtain bonding, your company needs reliable internal financial statements and well-established accounting and project management systems. In this, the support of an experienced construction accounting firm can prove indispensable.

At James Moore, our construction accounting group brings decades of experience advising construction companies throughout Florida and the Southeast. Our professionals provide assurance, accounting and tax planning services tailored to construction companies — ensuring that your company can secure bonding, correctly account for projects, and benefit from the many tax benefits available to construction companies.

To learn more about how James Moore can help your construction company prepare to obtain a construction bond, get in touch today.

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a James Moore professional. James Moore will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.