In construction, surety bonds are designed to manage the three-way agreements between the surety provider, the principal (usually, the contractor) and the obligee (often the owner of the property or the general contractor). When everything goes as planned, the bond is voided. When things go awry, the bond can determine liability for any losses. In essence, surety bonds are important for managing risk.

There are three main types of contract surety bonds used in construction:

  • Bid bonds: These bonds are designed to keep the bid process competitive and fair by weeding out unqualified bidders. Every contractor submits a bid bond when they put a bid in on a project. If they win the bid but decide to back out for some reason, this bond protects the project owner from losses. It can also assist the contractor who runs into cash flow problems.
  • Performance bonds: Every project has certain expectations that need to be fulfilled. If a contractor fails to meet those terms, the performance bond is there to keep the project’s owner from suffering financially.
  • Payment bonds: Every general contractor has suppliers, subcontractors and specialists that they need to hire. The payment bond (also known as a labor and material payment bond) makes it certain that those people will get paid once the job is finished. This protects their interests.

When there are problems with a construction project, you shouldn’t try to handle the issues on your own. An experienced construction law attorney can help you understand your rights and obligations under each kind of surety bond.