A bond is required for many construction projects, typically above $25,000 for government agencies. Bonds help to guarantee that a construction project is completed in the event that a contractor defaults on the construction contract/project. Bonds are typically issued by surety companies and can cost 1-2% of the project price.
There are three types of Bonds:
Bid Bonds are issued during the bidding process. Bid Bonds constitute a guarantee that a company will sign a contract for their specified bid price if they are the low bidder.
Performance Bonds ensure that the constractor will complete the job according to the contract. If they fail to perform, the performance bond guarantees that no money will be lost in bringing in another contractor to complete the work. A performance bond is a surety bond issued by an insurance company or a bank.
Payment Bonds guarantee that all suppliers and subcontractors will be paid for work performed.