Construction Bond
What Does Construction Bond Mean?
A construction bond is a type of surety bond used in the construction industry to protect the insured from potential financial losses if the construction company fails to meet its contractual obligations. While construction bonds are similar to insurance, they are not identical. If the construction company completes the project as agreed, the bond is typically voided.
A construction bond is also referred to as a contract bond.
Unlike a contractor’s own business policies, which pay the contractor when something goes wrong on a job, a construction bond pays the project owner if the contractor fails to finish the work or pay their suppliers. Contractors usually carry both, and the cost of general contractor insurance is separate from any bond premiums.
Insuranceopedia Explains Construction Bond
Construction projects involve many risks, which is why construction bonds are often required for projects exceeding a certain size and are essential in most, if not all, public and government projects. These bonds may take the form of performance and payment bonds: the former ensures the project is completed according to the contract terms, while the latter covers the costs of labor and materials owed to suppliers and subcontractors. Public agencies typically require contractors to carry general liability insurance alongside any bonds, since the two cover different things: bonds back up contract performance and payment, while liability policies cover property damage or injuries caused during the work.
For example, a construction company tasked with building a mall may provide construction bonds to the project’s investors. If the company fails—whether due to incompetence, errors, or unforeseen circumstances—the investors have a way to recover their losses. Construction bonds encourage investment in construction projects by reducing financial risks for investors.
