There are thousands of different types of surety bonds, but no industry involves a greater variety of surety bonds than the construction industry.
You need to obtain a Contractor License Bond in order to legally operate in the state where you conduct business. Each state (and some cities or towns) has its own bond requirements. The bond assures the state and the general public that you will comply with state licensing regulations and statutes.
Surety bonds are also required to bid or work on virtually all public works projects and many private construction projects. There are three major types of bonds for this field: bid bonds, payment bonds, and performance bonds. These bonds provide protection for the project owner and for taxpayers or investors in private projects. Usually, a project requires all these together.
Bid bonds protect a project owner if someone submits a bid and gets rewarded the contract, but pulls out of the project before it starts, insists on receiving more money to complete the work agreed upon, or is unable to obtain the agreed-upon construction bonding. Without bid bonds, project owners would have no way of guaranteeing that the bidder they select for a project would be able to complete the job properly. For example, an underfunded bidder might run into cash flow problems along the way. Bid bonds also help clients avoid frivolous bids, which saves time when analyzing and choosing contractors.
A payment surety bond is a legal contract that guarantees certain employees, subcontractors, and suppliers are protected in case they do not receive payment. You can think of a construction payment bond as an “insurance policy” in case the contractor cannot or will not pay the other parties on a construction project.
A performance bond is issued to one party of a contract as a guarantee against the failure of the other party to meet obligations specified in the contract. It is also referred to as a contract bond. A performance bond is usually provided by a bank or an insurance company to make sure a contractor completes designated projects. A payment bond is often obtained along with a performance bond.
All three of these bonds work in conjunction with each other. It is common that contractors will request all three of these surety bonds for their projects.