Why Are Construction Bonds Required?

Bonds can be thought of as sureties that guarantee that industry regulations are upheld and that operations will run smoothly. Contractors in the construction industry will need to be aware of several different types of construction bonds. Putting up a bond when proposing involvement in a project is required and expected of all construction contractors.

What Is a Construction Bond?

Bonds are essentially an investment tool that ensures financial security for those who are accountable for a project. If a construction project goes uncompleted or fails to meet specifications or regulations, the contractor and bond are held liable. The initial bond of a construction project acts as a statement that the contractor will complete the job in adherence to the contract.

How Do Construction Bonds Work?

Three parties are involved in forming and deploying a bond. The contractor puts forth a bond to the project owner or obligee, and the bond is backed by a surety company. Bonds are essential for building trust and guaranteeing that the obligee will not incur further losses on the construction project.

Project owners and investors face great risks when becoming involved in new construction. Bonds are required so as to mitigate that risk. It is a guarantee that money won’t be lost on the contract between an obligee and contractor.