Contractors Bond – All You Need To Know

What is a Bond Contract?

A bond contract is a legal relationship between the contractor, who is the main party, and the client, who is the second party, as well as the surety company, the third party. The surety company undertakes to indemnify the client for any loss they may suffer due to the failure of the contractor to fulfill the agreed contract. If the contractor does not satisfy this role, the surety company refunds the client for any losses that they may have incurred up to the bond amount. This structure gives clients an assured financial backup should they fail to meet their needs through their primary business operation.

What is a Bid Bond?

A bid bond is a type of surety, also known as a tender bond, provided during the bidding phase with the intent of engaging in a contracting project. It reinforces that if their bid is accepted, the contractor is capable of financially and committed to addressing the project’s needs. Usually, whereby if the contractor who has been awarded the project does not honor their bid or does not agree to sign the contract, then the bid bond pays back the project owner for the difference between the defaulting contractor’s bid and the second bidder’s bid. This tends to eliminate non-serious biddings, only contractors who are serious, capable, and willing to bid are given the chance to do so.

What are the 5 Main Types of Bonds?

Performance Bond
A surety bond ensures that the contractor in that project follows the agreement and standard set by the parties involved. In case the contractor is unable to fulfill this requirement, the surety company completes the work or pays the client money for incomplete work.

Payment Bond
A payment bond refers to a process in which a contractor pays all of the sub-contractors and makes sure that the client is held accountable for pending bills and payments. Moreover, payment bond also includes preventing legal disputes, and ensuring that all parties involved in the project are being paid for the services that they provide.

Maintenance Bond
The process of a maintenance bond includes a guarantee against ineffective work or materials that have been used wrong for a specified period of time. Through this bond, the contractor will be able to return and fix any possible issues that arise within the given warranty period. Moreover, this bond not only gives the clients peace of mind but helps them stay assured about the quality of work that they are receiving.

Supply Bond
A supply bond ensures that in a contract the suppliers do deliver the materials that are required at the agreed periods, quantity, and quality. This bond also shields the client from any bad material or slowed down progress as it guarantees that the section is completed to the best quality.

Subdivision Bond
A Subdivision bond is required in instances of real estate development where contractors are required to construct roads/sidewalks and utilities in accord with the standards of the local government. It is crucial to note that this bond ensures that the municipality and all future property owners are shielded in case the contractor fails to reasonably complete or provide standard improvements.

Frequently Asked Questions

Q1. How to calculate bond price?
To obtain the value of bonds to determine their price, you need to find the present value of cash flows that include interest payments for every period and the repayment of the bond at the end of its term. This is done by discounting these cash flows using either the yield on the bond on a similar bond or the market interest rate.

Q2. Which bond is strongest in construction?
The performance bond is usually considered the strongest in construction since it ensures that the contractor will finish up the construction as agreed upon in the contract. The use of surety bonds guarantees that if the contractor does not deliver, the surety company will complete the project or award the client with adequate compensation, making the financial risk very strong.


Contractors bond are not only a lifesaver for people who are involved in the process but they are essential for protecting clients from financial losses. So, if you’re seeking some help regarding surety bonds, Can Do Surety Bonds should be your go-to place.