Contract Bonds Overview

The following are the principle and more usual types of bonds utilized in the construction industry.
 

Bid Bond

A bid bond guarantees that the Principal (the bidder), if awarded the contract within the time stipulated, will enter into a formal contact with the Obligee and furnish the prescribed Performance and Payment Bond(s).  Default will ordinarily result in liability for the difference between the amount of the Principal's bid and that of the next lower bidder who can qualify for the contract, subject to the Bid Bond penalty.
 

Agreement to Bond - Consent of Surety - Bid Letter

This is a letter or an undertaking signed by a Surety Company under which the Surety agrees to furnish a Performance Bond and, if required, a Labour and Material Payment and/or Maintenance Bond on behalf of the bidder, if his tender is accepted.
 

Performance Bond

1. A Performance Bond guarantees the Principal's obligation to faithfully perform the terms and conditions of the written contract documents, including any maintenance obligation.
    
2. In certain circumstances, the Performance Bond extends to the Principal's obligation to design and build the project.  Such bonds are referred to as Design/Build Performance Bonds.
    

Labour and Material Payment Bond

1. Standard Form: A Labour and Material Payment Bond guarantees the Principal's obligation to pay for labour and material used in the prosecution of the work supplied by those having a direct contract with the Principal.



2. Broad Form: In certain circumstances the Labour and Material Payment Bond extends to those suppliers of labour and material not having a direct contract with the Principal.
    

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Supply Contract Bond

A Supply Contract Bond guarantees the Principal's obligation to perform the contract.

These guidelines apply to the furnishing but not installation of supplies of all kinds.

Where installation or erection is part of the contract, the bond is classified as a Construction Contract.
 

Maintenance Bond

A Maintenance Bond guarantees the Principal's obligation to remedy "defective workmanship or materials". However, Maintenance Bonds sometime incorporate an obligation guaranteeing "efficient or successful operation" or other obligations of like intent and purpose.
 

Completion Bond

A Completion Bond, unlike a Performance Bond, guarantees, in addition to the performance obligation, the successful financing of a construction project.  Such a bond is given, either directly or by assignment:

1. by an Owner as principal to lenders, lessors, mortgagees, trustees, municipalities or others.
    
2. by a contractor to an owner.
    
3. by a contractor to an owner and lenders, lessors. mortgagees, trustees, or others by assignment or otherwise.
    

Advance Payment

An advance payment is a payment made to the contractor by the owner prior to being earned.  Such advance payments maybe made in a single lump sum prior to commencement of the work or in a series of payments as work progresses.
 

Release of Hold Back

This instrument guarantees the Principal's obligation to indemnify the Obligee against any loss or damage as a result of any liens arising out of said contract, in a situation where the Obligee has released monies retained by them in accordance with the terms of the contract.