Question

Considering the entire procurement process (i.e., bidding through the contract award periods), what type of bonds are normally required to be provided by a bidder/proposer to be awarded a public works construction project?

Answer 1

CONSTRUCTION BOND TYPES

A surety bond is the financial guarantor of a construction bond, guaranteeing the obligee that the contractor will act in accordance with the term established by the bond. Surety companies will evaluate the financial merits of the principal builder and charge a premium according to their calculated likelihood that an adverse event will occur.

A surety can assist a contractor in having cash flow problems and may also replace a contractor who abandons a project. There are three main types of construction bond provided by surety:

1. Bid Bond

A bid bond is necessary for the competitive process biding. Each contending contractor has to submit a bid bond along with their bids to protect the project owner in the event a contractor backs out of the contract after winning the bid or fails to provide a performance bid which is required to start working on the project.

2. Performance Bond

A bid bond is replaced by a performance bond when a contractor accepts a bid and proceeds to work on the project. The performance bond protects the owner from financial loss if the contractor's work is defective and not in accordance with the terms and condition laid out in the agreed contract.

3. Payment Bond

This bond is also called a labor and material payment bond, which is a guarantee that the winning contractor has the financial means to compensate their workers, subcontractors, and suppliers of material.