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What is A Contract Bond?

Contract BondThe contract bond is a type of surety bond that guarantees a contract is fulfilled to the standards agreed upon by the contractor of a project and the owner. If the contracted party, the principal, fails to fulfill its duties according to the agreed upon terms, the contract owner, the obligee, can make a claim against the bond to recover financial losses or a stated default provision.

Widely used by the construction industry, contract bonds are also required in many commercial contracts within other industries such as service, supply, technology development, and manufacturing. However, all contract bonds guarantee the performance and/or payment of the obligations under the contract.

Contract bonds are usually required before the commencement of any public project over $100,000 because there is a lot at stake and the obligee wants to guarantee that if any aspect of the contract were to not be fulfilled, compensation for damages and loss would be paid.

FAQs about Contract Bonds

What are Contract Bond Requirements?

Contract bond requirements can include but are not limited to:
Management Contracts
Maintenance Agreements
Completion Orders
Commercial Services Contracts
Commercial and Construction Supply Contracts

There are generally 3 parts to the contract bond process; bid bond, performance bond and payment bond. The three parts are used together but are all completely different.

Contract bond vs construction bond

You may be confused about the difference between a contract bond and a construction bond, but there really isn't a difference. A contract bond is a type of construction bond and vice versa. The surety bond industry has various names for bonds that have the same purpose and provide the same guarantee. Contract and construction bonds are used by investors or project owners in various construction projects to protect themselves and their assets from fraudulent work, damage, financial loss, or any disruptions during the project.

What is a guarantee of performance?

A guarantee of performance is issued to a contractor by a bank or insurance company as a promise to complete the project in full according to the contract plans and specifications. This is not to be confused with a project requiring a performance and payment bond which is issued by a surety market and may require more extensive information about the project, contractor, and their history.

How do I start the contract bond process?

This is the easy part, just choose The Surety Place as your bonding team. Contract bonds are crucial for any construction company and making sure you get a good rate is so important. Our team of underwriters have a combined 50 years of experience writing contract bonds and all other construction bonds so they are sure to help you get the best rate and make the process as easy as possible.


Request your contract bond today!

Types of Contract Bonds

Bid Bond

A bid bond falls under the contract bond umbrella and can be seen as a pre-qualifier when a contractor is in the processes of trying to win over a bid for a large construction project. This is a good faith guarantee that says if the bidder is awarded the contract the bidder will fulfill the contract according to the bid terms including the posting of the performance bond. Bid bonds are usually between five and ten percent of the full contract amount. Once the bid bond has been accepted and the contract is awarded most contracts allow for at least 10 days to supply the final bond.

Maintenance Bond

A maintenance bond is also a type of contract bond, that ensures contractors will complete work to the standards outlined in the agreement while following all state regulations and producing work that isn’t shoddy or insufficient. The maintenance bond is crucial for any construction project. It requires that all work or repairs needed on the project are completed by the contractor through a specific period of time, even if the project has been completed. The specified time in which a contractor is legally required to fix any issues on the project will be outlined in the maintenance bond and if the contractor fails to oblige, the project owner can make a claim against the maintenance bond and the surety will pay what is owed to the claimant to ensure no monetary loss occurs to the principal.

Payment Bond

A payment bond is a surety bond that is issued to a contractor for a project that ensures subcontractors, laborers, and material suppliers are paid for the work they do in a timely manner. Unlike a performance bond that ensures satisfaction upon completion of a project, a payment bond ensures that the right people get paid for their work no matter the outcome of the project. A payment bond is typically issued with a performance bond after a bid is won and often all three are granted by the surety at the same time. A payment bond is a contract or agreement between the person requesting the bond (usually subcontractors, material suppliers, or laborers) and the principal (usually a contractor) who holds the bond, acknowledging that if payment is not made in a timely manner, the obligee can make a claim on the payment bond and the surety will pay the compensation to appropriate parties.

Performance Bond

A performance bond, another type of contract bond, is a surety bond that is issued to a contractor before the start of a construction project that guarantees the contractor will complete the obligations of the project to the satisfaction of the owner of the project as agreed to in the initial contract. The performance bond protects the obligee but is also used for future bond requests as proof that the contract provides quality work. If the principal fails to perform to the standards originally agreed upon, the obligee, usually the owner or investors, can file a claim against the performance to the surety. The principal is then required to repay any money that the surety paid out on behalf of the claim made. All claims should be worked out and paid for as soon as possible as to not risk losing licenses, and business in the future. Claims against a surety bond can be detrimental for a contractor.

Contractor License Bond

A contractor license bond is used as a contract to guarantee your clients are protected and is necessary in order to obtain a contractor license. A contractor license bond is beneficial for both you and your clients and should always be obtained when any kind of project bid is won. When you have a contractor license bond, you are agreeing to follow all state laws and regulations in accordance with that state. This is seen as another form of assurance for any project owner that lets them know the contractor they have hired is trustworthy and will not produce unlawful or shoddy work.

Improvement Bond or Subdivision Bond

An improvement bond, also known as a subdivision bond or a contract bond, are required from developers or home builders and are used to guarantee the completion of mandatory improvements to public buildings or entities that are used by the local community regularly. These bonds protect a specific city, county, or state. With an improvement bond, the principal of the public construction project is promising to complete mandatory improvements to public entities because such improvements are for the greater good of the community. A public construction project that may need an improvement bond includes the maintenance of streets, sidewalks, draining systems, gutters, sewers, public buildings etc.

Supply Bond

A supply bond is a type of contract bond that guarantees that a supplier will provide all materials, furnishings, and supplies as agreed upon in the initial signed contract. If the supplier fails to provide everything in the contract, a claim can be made against the bond by the owner of the project to supplement for any monetary loss. If a claim is filed against the supply bond, the surety will underwrite the purchase of the supplies against the loss. Supply bonds are required by law for public construction projects or by the project owner and having a claim against your supply bond can be detrimental to your business.


Over 50 Years of Combined Experience

The Surety Place has had one goal in mind since it was founded in 2002, to bring innovation and a high level of service the surety bond industry had yet to see. We have been industry leaders from the start and we know what it takes to underwrite every contract bond needed for any construction project. We are a people first company that you can trust, offering access to agents, specialty programs, and businesses to achieve the right solution at the right time.

National Surety With a Local Feel

What sets us apart from other sureties is that we establish a relationship with each of our clients as individuals in order to truly understand their business focus. Whether your company is large or small, your bonds are complicated or simple, we can help you get the contract bonds you need and grow your company. As small business owners ourselves, we know how hard it can be to get started and grow your business. We are here to help alleviate some of those stresses by getting you the contract bonds needed to bid on larger projects. Your needs as a business owner will be heard, and solutions will be found and implemented.

As one of the only true specialists within the industry, we supply access, partnerships, and specialty programs with numerous “A” rated sureties across the nation. The Surety Place is here to help you service all your customs bond needs with no appointments or contracts necessary. Our industry knowledge and expertise coupled with our ever-increasing specialty programs, give us the unique ability to write your bonds when no one else can.

The Surety Place can be your bond company for the life of your business. When you put your trust into our team of experts, you and your business will never be let down.