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A Better Understanding of How Construction Bonds Work

Operating a construction company and making deals and agreements with contractors can be very complicated. As there are always such huge budgets involved in every project and contract, the construction company, the contractor, and the customer all need protection.

A Better Understanding of How Construction Bonds Work

Construction bonds are the single best way to maximize the protection for all parties in an arrangement, and to make sure that each party’s rights are fully protected. Despite these benefits, construction bonds are still commonly misunderstood.

Construction bonds ensure that all parties in a contract live up to its terms by involving an impartial third party who has legal jurisdiction to make judgments in a contractual dispute.

To help people in the construction industry realize their benefits, here is how construction bonds work.

What Bonds Are Used in Construction

There are many different types of bonds that are used in different areas of commerce and industry, but those most relevant to the construction industry are contract bonds.

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There are three different contract bonds which everyone involved in construction needs to know about because they can help to make contracts far more secure.

The 3 Types of Construction Bonds

Performance Bonds

Probably the most important of the three different types of construction bonds are performance bonds.

The experts at explain that performance bonds ensure when a construction company or an individual customer hires a contractor or tradesperson to do a job, that they complete the work and to a high standard.

This is vital in the construction industry because it prevents contractors from taking the money and then doing a substandard job or even disappearing altogether. The impartial third party in a construction bond is called a surety, and they make sure that the contractor performs as they are contracted to do.

If they don’t, the party who hired them will be reimbursed so they can hire a replacement, and then legal action will be taken against the contractor by the surety.

Payment Bonds

The second type of construction bonds that are very important is payment bonds.

These ensure that when a contractor or construction company is hired to do a job, and they do it as stipulated in the contract, that they are paid accordingly. If the party which hired them refuses to pay or makes up some reason why they are withholding the money, the surety will pay the fee and then take action.

This ensures that nobody can shirk on paying the money they owe, and which they agreed to pay in the contract, from shirking on their financial obligations.

Maintenance Bonds

The third important bonds in construction are called maintenance bonds and they ensure that your contractor or tradesmen make any repairs or revisions necessary to get the work up to scratch.

Similar in application to a performance bond, maintenance bonds are necessary to make sure that you are not left with an unfinished job or one which has many faults. If your initial contractor refuses to do the extra necessary work to fix the issues, the surety will give you the money to hire another contractor and then go after your original one with added penalties.

The Three Parties in a Construction Bond Agreement

Construction bonds are different from other types of contractual agreements because they involve an impartial third party called the surety.

The surety has legal powers to enforce the terms of a contract and to seek recourse against either of the other two parties in the contract if they fail to honor its terms. The other two parties are called the principal and the obligee.

The principal is the party in the contract who hired a contractor or tradesperson (the obligee) to do a specific job. Principals may be a large construction company subcontracting a plumbing firm or it may be an individual hiring a plumber for their home extension. The obligee in these examples would be the plumbing firm or the plumber.

How Construction Bonds Work

There is a certain amount of risk involved in all contractual arrangements, not just construction contracts, but construction bonds help to reduce that risk for the principal and the obligee.

The presence and powers of the surety mean that neither the principal nor the obligee can take advantage of the other. This gives everyone involved peace of mind that all work will be completed to the necessary standard and that everyone will be paid as they should be.

construction worker

There are various ways in which construction bonds can help create strong, trustworthy construction arrangements. Both large corporate construction projects and those involving small family firms can benefit greatly from the right construction bond.


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