What Is a Contract Bond?

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A contract bond, also known as a bid bond, performance bond or payment bond, is a legal contract that outlines the procedures and requirements for a contractor hired from the outside. An entity will create this bond when hiring a contractor so the contractor will know what expectations it must meet and will be held accountable for work not completed. Contract bonds are often used when contractors create residential areas or build structures in commercial zones, although there are many applications.

Performance Bond

  • While performance bond is used interchangeably with contract bond, it can also specifically mean a contract bond that outlines what tasks the contractor will accomplish. This bond is usually combined with the payment bond, which details how the contractor will pay all workers, subcontractors and suppliers

Bid Bond

  • A bid bond is similar to a performance bond, except it is usually made before the contract is awarded. This is a common government process: contractors interested in bidding on a project will sign or submit a bid bond, which holds them to fulfill the contractual obligations if they win the bid.

Construction Bond

  • Construction bond is also used interchangeably for all contract bonds but refers primarily to contractors who are hired to complete some phase of a building process.

Site Improvement Bond

  • This type of bond is used when the principal entity owns the land and requires that the contractor restore any surrounding public property to its required state after the construction is completed. This is essentially a clean-up clause.

Supply Bond

  • A supply bond is a more elaborate form of the payment bond, detailing precisely how the contractor will pay suppliers for any materials used. These are required when a contractor wins a public construction project, and many principals will insist on having one for the private sector as well.

Subdivision Bond

  • Subdivision bonds ensure that landowners and contractors will together to make certain mandatory improvements to the home or area where construction has taken place. Local governments often require this bond to ensure that public areas and residential areas will be restored to original conditions after work has been done.

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