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​Types of Bonds

Different Types of Bonds Used in Contracting

​​Guarantee of bond

​Guarantees that a Contractor bidding for a contract will, if the bid is accepted, enter into a contract and furnish all bonds required to complete the project including performance, payment and maintenance bonds. Or, if the Contractor refuses to enter into a contract, the surety will pay you the difference between the amount of the bid and the bid finally accepted.

​Comments:

  • Can protect the state if the Contractor makes a mistake in bidding the project. If the Contractor leaves out an important portion of the project in the bid, and the bid is subsequently accepted, the surety would be obligated to pay the difference between what was bid and the actual cost to complete the project. 

​​​Guarantee of bond

​​​Guarantees faulty work of the Contractor will be corrected or defective materials will be replaced. This type of bond is purchased by a  contractor. It protects the owner of a completed construction project for a specified time period against defects and fault in materials, workmanship and design that could arise later if the project was done incorrectly.
​

​​Comments​​:

  • ​A performance bond sometimes includes the maintenance guarantee for a period of one year without additional charge. May provide protection from faulty work, or materials not covered by Commercial General Liability Products/Completed Operations coverage.

​Guarantee of bond

Guarantees that all suppliers of labor or materials for the project are promptly paid and that no liens will be filed against the state.

Comments:

  • Use in contracts for goods or services to ensure that the Contractor has made timely payment for materials and wages related to the project. Many times, a payment bond is included in a performance bond. However, it may be purchased separately.

​​Guarantee of bond

Guarantees that work will be completed according to the contract terms and conditions. This bond ensures payment of a sum of money in case the contractor fails in the full performance of the contract.

​Comments:

  • ​​The key bond on a work project when state agencies not only want the work completed but want it to be done on time and according to specifications. If the Contractor does not keep either of the promises, the surety is obligated to satisfy the state.  Builders' Risk and Commercial General Liability Insurance do not cover this exposure.

  • Use in contracts for goods or services if the time of delivery of goods or performance of services is critical.

  • The dollar amount of the bond depends on the costs necessary to complete or put the project back on track. Note: Some types of contracts require bonds at 100% of the contract. Contact DAS Purchasing for more information. The cost of a bond to the Contractor is based upon the surety's assessment of the Contractor's loss experience, assets and finances. Bond terms are usually 12 months. 

  • The Surety wants to minimize likelihood of default by checking out the Contractor’s reputation, ability and financial condition before writing the bond. Therefore, a performance bond may provide better assurance the Contractor is reputable and qualified to perform the job.

​Guarantee of bond

​​Guarantees to the obligee (the owner, i.e., state) that the principal (the contractor) is capable of performing the contract. This is a three-party agreement. The principal is the one responsible for obtaining the bond, and whos work performance is the subject of the bond. The obligee is the beneficiary of the bond, and usually is paying the principal for the work covered in the bond.

Comments:

  • A surety company will assess the contractor´s entire business operation, checking for adequate financial resources, necessary experience, organization, existing work load and its profitability, and management skills to carry on the business and successfully complete the project for which the bond is required. When it issues a bond, the surety company has verified that the contractor is capable of performing the job. The contractor´s premium is based upon this assessment of loss experience, assets and finances.
  • The surety company has obligations to both the owner, i.e., the state, and the contractor. If the contractor and owner disagree on contract performance issues and the owner declares the contractor in default, the surety must investigate the claim. The surety has several alternatives for response should the contractor be in default:
    • Finance the original contractor or provide support necessary to allow the contractor to finish the project;
    • Arrange for a new contractor to complete the contract;
    • Assume the role of the contractor and subcontract out the remaining work to be completed; or
    • Pay the penal sum of the bond.  Note: The amount in which a bond is issued is the "penal sum" or the "penalty amount" of the bond.
  • The surety company determines its response. Ultimately, it will seek full reimbursement from the contractor.