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What Is a Contract Bond?
A contract bond is a surety bond tied to a construction contract. It guarantees that the contractor will honor the bid, complete the work as agreed, and pay subcontractors and suppliers. If the contractor does not, the surety steps in.
How a contract bond works
Three parties are involved. The contractor (the principal) buys the bond. The project owner (the obligee) requires it. The surety company issues the bond and guarantees the contractor will meet the obligation.
If the contractor fails, the owner can make a claim. The surety investigates, and if the claim is valid it pays or arranges completion, then recovers its cost from the contractor. The bond is a credit-based guarantee, not insurance for the contractor.
The main types of contract bonds
Contract bonds follow the life of a project. Most contractors meet them in this order.
| Bond | Stage | What it guarantees |
|---|---|---|
| Bid bond | Bidding | The winning bidder will sign and furnish the required bonds |
| Performance bond | Construction | The project will be completed under the contract |
| Payment bond | Construction | Subcontractors, laborers, and suppliers will be paid |
| Maintenance bond | After completion | Defects will be repaired during the warranty period |
Contract bonds vs. license bonds
A contractor license bond is a different kind of bond. It is required by a state or city to hold a license, and it is not tied to one project. Many contractors need both: a license bond to operate, and contract bonds for individual jobs.
Who requires contract bonds
Public owners are the most common requirement. Federal projects follow the Miller Act, and states have similar laws, often called Little Miller Acts. Private owners and lenders can require bonds in the contract, most often on larger projects.
What contract bonds cost
Performance bonds are generally 3% of the bond amount, which is stated on the bond form. Payment and maintenance bonds are usually included with it, and bid bonds are free. Credit, financial strength, and experience still decide whether you are approved.
Related bonds
Bid Bond
Guarantees your bid. If you win and walk away, the owner is paid the difference.
Performance Bond
Guarantees you will finish the project under the contract terms.
Payment Bond
Guarantees you will pay your subcontractors, laborers, and suppliers.
Maintenance Bond
Covers defects in materials or workmanship after the project is finished.
Common questions
Is a contract bond the same as insurance?
No. Insurance protects the policyholder. A contract bond protects the project owner and the people working on the job, and the contractor reimburses the surety for any valid claim.
Who pays for a contract bond?
The contractor pays the premium, and usually builds it into the contract price.
Do I need all four contract bonds on every job?
No. The bid documents and contract list which bonds are required. Public jobs usually require bid, performance, and payment bonds. Maintenance bonds appear when the owner wants a warranty guarantee.