Understanding the Different Types of Construction Bonds

Bonds are frequently used to help reinforce industry regulations, and are particularly common in the construction field. It is not uncommon for contractors to know little about bonds until they are informed of their obligations. In order to make the process run smoothly, land new projects, and drive additional revenue, construction professionals should familiarize themselves with frequently-requested types of bonds that help regulate the industry.

Speak to a New Mexico insurance agent that specializes in insuring construction operations and contractors to find out what best suits the business, and learn more about the different bond types below.

Contractor License Bonds

This type of bond is required by state before you are licensed to work on projects. It simply ensures that contractors follow all applicable licensing laws and regulations. Without the bonds in place, contractors cannot be licensed, so attempting to work on projects without a contractor license bond will lead to repercussions; including penalty fines, license revocation and legal action.

Bid Bonds

Bid bonds are frequently requested in pairing with financial proposals contractors provide to project owners. Project owners may require contractors to obtain a bid bond before they accept the construction contract.

This guarantees that the contractor will enter into a contract for the original amount bid if the contract awarded, by placing trust in the contractor and guarantees they will, upon award, fulfill the contract to the bid terms.

Payment Bonds

Contractors must secure payment bonds before awarded contracts that exceed $100,000 or for any publicly funded project that includes the alteration or repair of a building that costs $100,000 or more.

They ensure subcontractors and material suppliers get paid for their contributions to a project while keeping the project owner from assuming these costs if the contractor cannot pay.

Performance Bonds

Performance bonds are often coupled with payment bonds because both protect the project owner from incurring loss due to contractor shortcomings.

They guarantee quality completion of the project as outlined in the contract, while the time allotted to complete construction must also be upheld. If the project takes longer than anticipated or is completed in an unsatisfactory condition, the owner can make claim on the bond. The bond can be used to compensate the owner if contractor’s fail to uphold the contract’s terms.

Supply Bonds

These bonds guarantee  contractors faithful performance to obtain supplies or materials. If the supplier fails to provide the supplies as agreed, the bond is used to reimburse the purchaser for the resulting loss.

Maintenance Bonds

Maintenance bonds protect against design defects or failures in workmanship after project completion. The bond amount can be used to pay for repairs.

Subdivision Bonds

These require contractors to build or renovate public structures within subdivisions (streets, sidewalks, waste management systems). If a contractor fails to do so, the bond may be used to complete the subdivision project appropriately.

Site Improvement Bonds

These bonds guarantee the completion of certain improvements made to projects; normally used for renovation projects to update old structures or properties.


About Daniels Insurance, Inc.

At Daniels Insurance, Inc., we have a unique understanding of the risks that businesses like yours face on a regular basis. With the backing of our comprehensive coverages and our dedication to customer service and quick claims resolution, your business will be fully protected. For more information, contact us today at (855) 565-7616.