What are construction surety bonds, and what are some of their types?

If you are a contractor and have been working in the construction industry for quite some time, you would be familiar with the term construction bonds. You should have these documents while bidding on a tender or receiving a contract.

Without a bond construction form, a project owner would be unwilling to award you a project, as they would have no assurance of your completing it on time as per the contract’s obligations. Here are some additional details that will give you a better understanding of these.

What are construction bonds?

It is a guarantee given by the contractor that they will complete the construction within the specified time and budget. If the contractor fails to do this, the project owner claims the bond, which the surety company pays. The contractor agrees to pay the surety if they breach their obligation under this contract.

Which companies use them?

A variety of companies require construction bonds, with the most common being construction companies that undertake projects for public sector projects. Other industries that require these bonds are trucking, technology, and service.

General, plumbing, electrical, sewer and maintenance, road paving, and heavy civil contractors require these bonds in the construction industry. Contractors that provide services like snow removal, tree cutting, janitorial, and tree cutting also need these.

Although performance bonds are mandatory for all public projects over 500,000 CAD in value, even private sector companies include these in their tender specifications.

What are some types of construction bonds?

Bid surety bonds

A bid bond guarantees that the contractor (the Principal) will enter into a contract with the project owner (also called Obligee) even if they are the lowest bidders and win a tender. Although these bonds are 10% of the contract value, some owners will ask between 5 to 15%, or an amount they think is worthy of securing their interest in bidding on projects.

Performance surety bonds

Performance surety bonds ensure that the contractor will perform their obligations according to the contract. A third party, such as a surety or insurance company, usually issues these.

Labour and Material Payment bonds

These bonds ensure that subcontractors and suppliers receive payment for the works and materials they supply on a project.

Construction lien bonds

Claims on these bonds are made by contractors or subcontractors who haven’t yet received payment for a complete project. A contractor may request a lien bond to remove a construction lien placed by a subcontractor.

A mechanic’s lien is another legal claim made against the property owner by a contractor hired to perform work on their behalf but who does not have the right to retain ownership of the materials used during that process.

How to get construction bonds?

Although surety companies issue these bonds, plenty of processes and documentation are involved. The quickest way is to contact a surety brokerage company that will assist you with the procedures and help you get a bond that suits your project’s requirements. Since they have working relationships with various surety companies, they are trusted by the surety market.

You should consider getting a bond construction form because it establishes your credibility as a contractor and will help you get more projects from owners. It is also mandatory; without it, you have minimum chances of landing a project. A surety brokerage company can help you get the bond you want.