Chapter 4 — Construction & Contractors
Why Are Surety Bonds Common in Construction Projects?
Construction contracts often involve significant obligations, schedules, advances and post-completion duties, so a project owner or Obligee may require security. A surety bond may be one permitted form, depending on the applicable contract, procurement documents, law and circumstances.
Direct answer
Surety bonds appear often in construction because construction contracts usually create substantial obligations over a period of time. A project owner or Obligee may therefore require security in connection with those obligations. A surety bond may be one acceptable form of that security, depending on the applicable contract, procurement documents, rules, circumstances and law. Not every construction project requires a bond, and not every security requirement permits a surety bond.
Why construction creates security questions
Construction work usually involves a defined scope, a schedule, staged payments, technical requirements and obligations that continue after the work is finished. Because performance happens over time and depends on money, people, equipment and management, the party requiring the work may want assurance connected with the obligations it cares about.
A surety bond is a three-party undertaking involving the Principal, the Obligee and the Surety. See What Is a Surety Bond? for the underlying structure.
Where bonds may appear in a construction project
Bid stage
Where the applicable rules or documents require bid security and permit a bond form, a bid bond may be used.
Performance of the contract
Where performance security is required and a bond form is permitted, a performance bond may support specified obligations under the contract.
Advance payments
Where the contract provides for an advance payment and requires security connected with it, an advance payment bond may be used.
Payment obligations
Where the contract and bond so provide, a payment bond may support specified payment obligations.
After completion
Where warranty or maintenance obligations apply, a warranty or maintenance bond may support specified post-completion obligations.
Important considerations
- A bond does not perform the construction work. The Principal's obligations arise from the underlying contract and applicable law.
- The Surety's undertaking is defined by the bond wording, amount, validity and conditions.
- One bond does not automatically become another. A bid-stage bond does not turn into a post-award bond.
- Whether a bond is required, and which form is acceptable, must be read from the actual contract or bidding documents.
Practical application
Before requesting any bond, identify the exact security requirement, the permitted form, the correct Principal and Obligee, the amount or basis stated in the documents, the validity requirement and any prescribed wording. Evaluation, underwriting, requirements, terms, approval and issuance remain with the applicable insurer or Surety.
Key takeaway
Construction obligations often lead to security requirements, and a surety bond may be one permitted form. The requirement and acceptable form come from the applicable contract, procurement documents, rules and law — not from an assumption that every project needs a bond.
Related topics
Relevant bond information
Need information about a surety bond requirement?
Submit an inquiry with your project details, and SuretyPH will organize your submission for the applicable insurer's evaluation.
Important Notice
Inquiries and supporting documents submitted through SuretyPH may be referred to the applicable participating insurer for evaluation. Submission does not constitute approval or issuance of a surety bond. Applications are subject to the insurer's requirements, evaluation, underwriting, terms, conditions, and approval.
SuretyPH is a digital platform for surety bond information, inquiries, requirements and request tracking. It does not underwrite, approve, bind, issue, or guarantee any insurance policy or surety bond. Evaluation, underwriting, approval, pricing and issuance are undertaken by the applicable licensed insurance company.