What is a Contractor Bond?

A contractor bond, often referred to as a surety bond, is a type of financial guarantee that ensures a contractor will fulfill their obligations according to the terms of a contract. 

It protects the project owner or obligee from potential financial losses due to the contractor’s failure to complete the project, meet specifications, or pay subcontractors and suppliers. 

There are several types of contractor bonds, each serving different purposes:

Types of Contractor Bonds

• Performance Bond: Guarantees that the contractor will complete the project according to the contract terms.
• Payment Bond: Ensures that subcontractors and suppliers are paid for their work and materials.
• Bid Bond: Guarantees that the winning bidder will sign the contract and meet its specifications.
• Maintenance Bond: Protects against defects in workmanship or materials for a specified period after project completion.
• License and Permit Bond: Ensures compliance with local regulations and licensing requirements.
• Subdivision Bond: Used for infrastructure projects, ensuring they are completed without financial harm to municipalities.

How Contractor Bonds Work

Parties Involved: 

• Principal: The contractor purchasing the bond
• Obligee: The party protected by the bond, usually the project owner
• Surety: The company providing the bond, responsible for ensuring the contract is fulfilled if the contractor fails

Purpose: To provide financial assurance that the contractor will meet contractual obligations. If a contractor fails to comply, the surety pays the claim and is then reimbursed by the contractor.

Requirement: Often mandatory for public projects and sometimes required for private projects. In many states, contractors must be bonded to operate legally.

Contractor bonds are distinct from insurance, as they protect the project owner rather than the contractor. They are essential for ensuring that construction projects are completed as agreed upon and that all parties involved are protected financially.

Contractor bonds are just the beginning. Discover how to navigate the rest of your compliance checklist with these related Workyard guides:

• Ohio Break Laws: Meals, Rests, and More (2025)
• Oregon Overtime Law: Your Guide to Rates, Statutes, Calculations, and More (2025)
• North Dakota Labor Laws: A Complete Guide to Wages, Breaks, Overtime, and More (2025)
• Prevailing Wage in Illinois: a Guide to Rules, Requirements, Rates, and More for 2025

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