Types of Surety Bonds for Construction Projects

Contracts between construction project owners, investors, developers and contractors are essential, however, for bigger budget construction projects, a “surety bond” may also be needed. This bond provides additional protection for project owners, investors and developers by guaranteeing the contracts they have with contractors will be completed. Florida construction litigation attorneys can help owners file construction bond claims for financial compensation.

First… What is a Surety Bond?

Construction bonds, also called contract bonds, are types of surety bonds for construction projects. These bonds are issued by a “Surety,” either an insurance company or bank, and are among the following parties.

Principal — often the contractor, is the one who must perform the contractual “obligation.”

Obligee — the party who the principal owes their obligation to, often the owner, developer, or investors of the project.

Surety — is legally responsible for the principal performing the obligation according to contractual terms and industry regulations.

Beneficiaries — are entitled to sue on the bond (file construction bond claims) if the obligation fails to be completed, typically owners, developers, investors, subcontractors, or suppliers.

Common Types of Construction Bonds

Bid Bond

Multiple contractors bid to be considered for a construction project. Bid bonds guarantee that once a contractor is selected for the project, they will honor their bid and take on the project. If the bid is not honored, the project owner (obligee) can sue to enforce the bond, while the contractor (principal) and surety are liable for any additional costs that are incurred to find a replacement contractor.

Performance Bond

Performance bonds guarantee the contractor will complete the construction in accordance with the terms of the contract including quality expectations and limits on price and time. Otherwise, project owners can file construction bond claims. If the contractor fails to finish the project, the surety must complete the contract by assigning the contract to a new contractor or paying the costs of completion by the owner.

Payment Bond

These type of bonds guarantees that subcontractors and suppliers receive the payments they are due from the primary contractor (principal) for their contributions to a conduction project. With payment bonds, the owner is the “obligee,” but the direct “beneficiaries” are the subcontractors and suppliers. If non-payment occurs, the beneficiaries can seek compensation from the contractor and surety. The bond protects the project owner from assuming these costs if the contractor cannot pay or becomes bankrupt.

Surety bonds for construction projects are very common. If you or your firm is entering a construction project as an owner or contractor, having an elementary understanding of construction bonds is beneficial.

Want to learn more about surety bonds or construction bond claims? Consult with experienced Florida construction litigation attorneys. Call the law offices of Kelley Kaplan & Eller today.