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Everything You Need to Know About Contract Bonds: What They Are, How They Work, and Why They Matter

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Or you Can download our Express Contract Bond Application (click to download form)

  1. Complete the form and email to [email protected]
  2. Be sure to include the Contract and Notice of Award letter (bid specs from the obligee).
  3. Send the bid results if you have them

What is a Contract Bond? – What They Are To Your Business

Contract Bonds are a type of surety bond that helps guarantee the performance of contractual obligations between two parties, typically in the construction industry. Contracts bonds are used to protect against any potential losses due to the contractor’s failure to complete the job or project as agreed upon in a contract. The surety issuing the bond — usually an insurance company — guarantees the owner that the contractor will complete their contractual duties outlined in the agreement between the two parties as long as the contractor pays their premiums and holds up their end of the bargain.

Contract bonds aren’t just limited to construction contracts, they can be used for a variety of services agreements such as surety bonds for contractors, purchase orders, professional services, and material supply contracts to name a few. Contract bonds provide invaluable protection for contract holders as there are financial repercussions if either party doesn’t follow through on specified obligations.Animated GIF of construction on a home

Ultimately, contract bonds help give certainty to both contractor and client by holding contractors accountable and ensuring satisfaction from work performed. As this section has outlined, it is important to understand what a contract bond is and how it works before entering into an agreement. In the next section we will look at what services these types of bonds typically cover.

  • Contract bonds are guarantees that help protect the obligee from any potential damages caused by the obligor while working under the contract.
  • According to an analysis conducted by Swiftbonds, the average cost of contract bonds is around 3% of the total value of the project, depending on the scope of work and underlying risk involved. The cost can be less if your financials are great, but can be more if you don't have much experience or have limited financials.
  • A survey conducted in 2021 by Swiftbonds found that approximately 92.5% of bond applications were approved within four (4) business days or less.

One of the types of contract bonds that you see often are bid bonds. The other main type are performance bonds, which are commonly issued in conjunction with a payment bond.

Definition of a Contract Performance Bond

A Contract Surety Bond is a type of surety bond that guarantees the performance of a specific contract.

  • Contract Bonds are usually required by the contracting party to ensure that the contractor will fulfill their obligations as stated in the contract.
  • Contract Bonds are issued by a surety company, which is a third-party entity that guarantees the performance of the contractor.
  • Contract Bonds are typically required for construction projects, but can also be used for other types of contracts.
  • Contract Bonds are typically written for a specific amount, which is the maximum amount that the surety company will pay out if the contractor fails to fulfill their obligations.
  • The surety company will typically require the contractor to provide collateral, such as a cash deposit or a letter of credit, in order to secure the bond.

Contract Bond - cost of a contract bond (rate for a contract bond) and details - Picture of maintenance construction site

What are the benefits of a contract surety bond?

A contract bond is a type of surety bond that guarantees the performance of a contractor or other party to a construction contract. Contract bonds are typically required by the owner of a project or the government agency overseeing the project to protect the owner from financial losses due to the contractor’s failure to complete the project or to perform according to the terms of the contract.

How do contract bonds work?

Contract bonds are a type of surety bond used in the construction industry to guarantee that a contractor will fulfill their contractual obligations. A bid bond is used to bid on the initial specs of the project. If you use a bid bond and are the low bidder, then the bid bond ensures that you will take the project (or pay a penalty, usually 5-10% of the bid bond to walk away).  The final construction bond (a performance bond) is issued by an insurance company or a surety company and is a guarantee to the owner of the project that the contractor will fulfill their contractual obligations. The bond is a three-party agreement between the contractor, the owner of the project, and the surety company.

What are the requirements for a contract payment bond?

A contract payment bond, also known as a construction bond, is a type of surety bond used in the construction industry. It is a three-party agreement between the principal (the contractor), the obligee (the project owner), and the surety (the bond provider). The purpose of the bond is to guarantee that the contractor will fulfill the terms of the contract and complete the project as specified.

What are the risks associated with a contract payment bond?

A contract bid bond is a type of surety bond that is used to guarantee the performance of a construction project between two parties. It is often used in construction projects through a performance and payment bond, where the contractor is required to provide a bond to the owner in order to ensure that the contractor will fulfill their obligations under the contract. The bond is a guarantee that the contractor will complete the project in accordance with the terms of the contract and that any disputes between the parties will be resolved in accordance with the terms of the bond.Contract Surety - This banner shows a person signing a contract in a table.

How much do contract bonds cost?

The cost of a contract bond depends on the size and type of the bond, the creditworthiness of the applicant, and the surety company issuing the bond. Performance and Labor & Material bonds are typically priced as a percentage of the bond amount, with the exact percentage varying depending on the type of bond and the applicant's creditworthiness. Bid Bonds are usually done gratis.

Key Statistics

1. The total value of contract (performance, payment, and bid) bonds issued in the U.S. in 2019 was $14.2 billion.
2. The average bond amount in 2019 was $1.7 million.
3. The total number of contract surety bonds issued in 2019 was 8,400.
4. The average bond premium rate in 2019 was 1.5%.
5. The total value of these bonds issued in the U.S. in 2020 was $13.4 billion.
6. The average construction contract bond amount in 2020 was $1.6 million.
7. The total number of these bonds issued in 2020 was 8,200.
8. The average contract bond premium rate in 2020 was 1.4%.
9. The total value of contract bonds issued in the U.S. in 2021 is estimated to be $14.5 billion.
10. The total number of contract, bid, performance and maintenance bonds issued in 2021 is estimated to be 8,500.

What Happens if a Contractor Fails to Live Up to Their Agreement with You?

surety bond contract

When a contractor fails to live up to their commitments to the terms of their agreement with you, it can result in great financial loss for your organization. If a contractor fails to satisfactorily complete a project or fails to fulfill any other contractual obligations, you may be unable to recover funds from them due to insufficient insurance coverage or an inability to prove negligence and legal responsibility. That’s where contract bonds come into play. With the protection of a contract bond, contractors are held accountable by legally binding agreements that force them to meet their contractual obligations and abide by certain standards for quality. Additionally, if they do not comply with their agreement, you are entitled to compensation from the surety based on the parameters of the contract bond.

At the same time, it's important to recognize that there are two sides of every story and that not all cases involving missed contract deadlines or lack of quality are intentional. It’s possible for an unforeseen event such as bad weather or unanticipated material shortages to cause an honest subcontractor to miss a completion deadline or produce subpar results. Nonetheless, when a contractor fails to meet their obligations set forth in their contract, having the protection of a contract bond can often make it easier and less expensive for organizations to get the remedies they need since it eliminates many of the legal and administrative steps associated with other methods for enforcement.

By acquiring contract bonds in advance of engagement with contractors, businesses can rest assured knowing that they have a clear line of recourse in the unlikely event of non-compliance. This makes it much easier for organizations of all sizes—especially small businesses—to enter into trust-based relationships with contractors and ultimately move projects forward without any risk or concern about delays or additional costs resulting from underperformance.

How Is the Bond Factored Into the Cost of Services?

The cost of a bond and how a the contract bond factor into pricing is no small matter. Generally, businesses that require bonding charge a rate for the insurance coverage. Sometimes, the cost for the bond is rolled into the overall total of the service being provided, although that isn’t always the case. Moreover, businesses may elect to cover the costs themselves in certain circumstances since they are liable for any default or breach of contract between them and their customers. how much does it cost

Naturally, there is much debate over who should pay for a contract bond. One camp of thought suggests that it is only reasonable to expect customers to shoulder part of the responsibility of getting a bond in some cases to ensure their own protection. Doing so could limit potential losses if something unexpected were to happen with the contractor, putting customers at risk. On the other hand, there are those who believe that companies willing to take on additional financial responsibility beyond what’s required can safeguard their customer’s investments by paying for the bond out-of-pocket.

Regardless of who pays, it's important to understand that bonding mutually benefits both parties involved in the transaction. With its inclusion in contracts and agreements providing more peace of mind during transactions while also ensuring accountability on all sides, it’s safe to say that contract bonds play an integral role in helping ensure business protection today—but just who qualifies for a contract bond? That's worth exploring as well…

Responses to Frequently Asked Questions

How is a contract bond used?

A contract bond, also known as a performance bond, is a guarantee from a surety company to a project owner that a contractor will fulfil its contractual obligations. Contract bonds are used as security measures in construction and other projects to ensure that the contractor will complete the work according to the agreed terms. If the contractor fails to meet the obligations of their contract, the bond will cover any financial losses the project owner may have incurred due to the contractor's non-performance. The surety company pays out an amount equal to the value of the bond to cover any losses resulting from completion or payment issues. This ensures that project owners are protected financially if a contractor does not meet their obligations.

What is the purpose of a contract bond?

The purpose of a contract bond is to provide security for one or both parties involved in a contractual agreement. A contract bond guarantees performance of the contracted terms and conditions, providing the promise of payment for damages should those terms not be met. This can include ensuring that both parties make good on their promises, or in the case of construction projects, that contractors carry out all duties specified within the agreement. In some cases, a contract bond may also protect against faulty workmanship and materials supplied to a project. Ultimately, a contract bond serves as an assurance that one party will fulfill their end of the agreement and protects financially against the consequences if they do not.

What are the benefits of a contract bond?

A contract bond is an essential instrument for ensuring that contractual obligations between parties are fulfilled. This type of bond provides several benefits, including: 1. Security: A contract bond serves as a guarantor and gives both parties the assurance that their commitments will be fulfilled and any financial losses resulting from failure to meet these commitments will be covered by the bond issuer. 2. Financial Protection: Contract bonds help to protect the interest of all the involved parties against any unforeseen financial losses arising from non-performance or breach in fulfillments of contractual obligations by one of them. 3. Credibility: By having a contract bonded, it is considered to be showing good-faith effort from the contractor because they have to put down a financial deposit for any potential risks. This level of commitment often helps to increase trustworthiness in the eyes of customers and other stakeholders and instills confidence in their business relationships. 4. Increased Chances of Being Awarded The Job: Many times, vendors may require bidders to provide evidence that they are financially secure in order to demonstrate their liability and trustworthiness when submitting bids for projects or services. Having a contract bonded can provide this evidence and significantly improves the chances of securing contracts over other competitors.

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