In construction there are a lot of risks that can occur over the course of a project, both physical and financial in nature. As a result, measures such as insurance and bonding have been developed to help mitigate these risks and provide stakeholders the protection and peace of mind they need in order to get started.

As I mentioned before in my previous post about insurance (in case you missed it, check it out here), bonding is simply a means of protection for the owner against non-payment, poor performance, defaults, and warranty issues. There are actually several different types of construction bonds available, with new ones constantly being added as needs evolve.

In this article, we will focus on the most common types of bonding found in construction, breaking down who buys them, who can make claims, and how much they might cost.

It is often beneficial to think of construction bonding in the same light as an insurance policy, with the main difference being that a bond contract is between 3 parties (obligee, principal, and surety), whereas insurance is just two. Insurance and Bonding differ in a couple of other aspects as well. For example, an insurance provider typically holds all the financial risk, whereas in bonding the risk is held by the applicant.

Typically, a contractor purchases a bond to either protect themselves and/or the project owner from potential issues during the course of a project. If a problem arises, the project owner (obligee) can file a claim against the principal, ultimately recovering the additional costs they incurred due to the default.

This is where things get a little different than insurance. Once a bond claim has been paid to an owner (obligee), the contractor (principal) must then pay back the surety for any money they paid out on the contractor’s behalf.

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