Definition - What does Construction Bond mean?
A construction bond is a type of surety bond used in the field of construction to protect the insured against the possible loss of their investments in construction projects due to a failure of the construction company to fulfill their obligations. Construction bonds are similar to insurance but not exactly the same. If the construction company completes the project as expected, then the bond is generally voided.
A construction bond may also be known as a contract bond.
Insuranceopedia explains Construction Bond
A construction project presents many risks; therefore, construction bonds are often required in any project exceeding a certain size and necessary in most, if not all, public and government projects. Construction bonds may come in the form of a performance and payment bond, the former to ensure job completion in line with the contract terms and the latter to cover the costs of labor materials to suppliers and subcontractors.
For example, a construction company tasked with building a mall offers construction bonds to the investors of a development. This way, if the company fails, either due to incompetence, mistakes, or unforeseeable circumstances, then the investors have a way to recuperate their losses. Construction bonds increase the incentive to invest in construction projects because they reduce risk for investors.