Three Forms of Bond Protection

Posted by Steve Snodgrass on Mar 18, 2015

Graniterock CFO Steve Snodgrass contributes another  article excerpted from the 1956 Engineering News-Record which shows how “the more things change the more they remain the same.” 

Although widespread use of surety bonds to protect owners, contractors, subcontractors and suppliers is sometimes regarded as a Twentieth Century phenomenon, the surety bond has a long history in the construction field. Records show, for example, that a gateway construction contract let in Rome in 106 B.C. provided that “whoever shall be awarded the contract shall furnish bondsmen secured by real estate to the satisfaction of the magistrates.” This same contract also had a provision that many a modern contractor would envy – it called for payment to the contractor of one-half of the contract price as soon as he had executed his bond, with the other half to be paid upon completion and acceptance of the work. 

This bond is a direct ancestor of the performance bond, which along with the bid bond and payment bond constitutes the three principal types used in the construction industry today. The first of these three, the bid bond, guarantees that you will, if awarded a contract, accept that contract on the exact terms of your bid, and will execute performance and payment bonds – or forfeit a sum of money.

Usually, each bidder is required to furnish a bid bond in some specified amount. This bid bond protects the owner in case the low bidder refuses to sign the final contract and furnish his performance and payment bonds. If the low bidder does breach the contract in this manner, the owner can recover as damages the cost of re-advertising the job, any additional architectural or engineering costs – and the amount by which the new low bid exceeds the bid of the defaulting contractor.

A performance bond is a guarantee by the surety that the contractor will fulfill the terms of his contract, i.e., build the project according to plans and specifications within the time allotted in the contract and in a workmanlike manner. A payment bond is a guarantee by the surety that the contractor will pay his suppliers for labor, materials and services rendered in the construction of the project.

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