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Surety Bonds Explained: What’s the Difference? Are they Necessary?

02/08/2024 Written by: AP Construction

Surety bonds play a crucial role in the construction industry, providing financial protection and ensuring project completion. Two common types of surety bonds used in construction projects are bid bonds and performance bonds. While both serve as a guarantee, they have distinct purposes and functions.

When looking into a surety bond for your company, you’ll want to select the correct type. Let’s take a closer look at bid bonds vs. performance bonds to help you understand which one will work best for you.

Bid Bonds

  • Typically required during the bidding process for construction projects and are a percentage of the bid amount (5% - 10%).
  • Contractors are required to submit a bid bond along with their proposal to demonstrate their commitment and financial capability to take on the project, if awarded.
  • Acts as a guarantee that the contractor will enter a contract and provide the required performance bond if selected as the winning bidder.
  • Provides a guarantee to the bond owner that they will be compensated if the bidder fails to begin the project.

Performance Bonds

  • Issued when the contract is awarded to the contractor and is usually issued for the full contract amount.
  • Provides assurance to the project owner that the contractor will complete the project according to the terms and conditions outlined in the contract.
  • Protect the project owner from financial loss if the contractor fails to fulfill their obligations due to delays, substandard work, or project abandonment.
  • If a contractor defaults, the surety company issuing the bond will step in and ensure the project is completed or compensate the project owner for any financial losses incurred.

Both bond types provide financial security and protect the interests of all parties involved by promoting fair competition, accountability, and project success. They give project owners confidence in the contractor's ability to complete the project and safeguard contractors from unfair bidding practices.

The surety experts at AssuredPartners are ready to develop a comprehensive program to help drive contracts and keep businesses running smoothly. Let’s partner together to explore your options and provide the best coverage for your future projects.

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