A construction bond, also known as a contract bond, is a type of surety bond that guarantees contracts will be fulfilled. There are four common types of construction bonds, the license bond, bid bond, performance bond and payment bond.
A license bond is required in California to activate a contractor’s license. The license bond is your guarantee that you will comply with the laws and regulations while working as a contractor.
Bid Bonds are issued during the bidding process by a contractor for the project owner. The bid bond is a guarantee that the winning bidder will carry out the project based on the terms and conditions of their bid. The bid bond protects the project's owner if the bid is not honored by the contractor. Bid bonds are intended to keep bidding process fair for everyone.
Performance bonds are a guarantee that a contractor will complete a project in accordance with the terms of the contract. If the contractor fails to complete the project per the contact, then the project owner may place a claim against the contractors performance bond. In such a case, the surety will hand the contract to a new contractor or pay the costs for the owner to complete the contract. Performance bonds are required by law for public construction projects.
Payment bonds are a surety bond posted by a contractor to guarantee that its subcontractors, laborers, and suppliers will be paid in a timely fashion and in compliance with the contract. Payment bonds also guarantee that payments for labor and material will comply with state and federal laws and regulations.
Payment bonds are often required in conjunction with performance bonds. The bond holder benefits from a payment bond because it provides a substitute to a mechanic's lien as a remedy for non-payment.