Construction Bond Glossary

BENEFICIARY:

A person who is entitled – by law or bond language – to claim against a bond even though not specifically named as an Obligee. 

An obligation undertaken by a bidder promising that the bidder will, if awarded the contract with the time stipulated, enter into the contract and furnish the prescribed performance and payment bond(s). 

An obligation undertaken by a third party promising to pay if a contractor does not fulfill its valid obligations under a contract.  Some bonds may also promise that the Surety will perform if the contractor fails to. 

A bond which promises to reimburse an Obligee for loss incurred when a Principal fails to perform its contract or (in some cases) fails to pay for material, services, or labor used in the prosecution of the contract. 

A right given by statute to certain persons – typically suppliers, laborers, architects, etc. – who perform services improving real property.  If they are unpaid, they may file a claim against the property and force the owner to pay even if the owner has already paid a prime contractor for their goods and services. 

The named person to whom, under a bond, the promises of the Principal and the Surety run.  For a prime contract performance bond, the Obligee is usually the owner. 

A bond which provides indemnification to the city or state named as Obligee for loss or damage resulting from failure of the Principal to comply with the applicable law, ordinance, or regulations. 

A bond which promises to pay some or all of the persons who provide materials, labor, or services for prosecution of a contract. 

A bond which promises that the terms of a contract, or some of them, will be performed by the Principal. 

The limit of the Surety's liability under its bond.  The amount may be fixed by statute (for license and permit bonds), by the initial contract amount (for performance/payment bonds), or by some other means. 

The bonded contract, who has the primary responsibility for completing the obligations of a contract. 

The third party (usually an insurance company) who promises to pay if the Principal fails to fulfill its obligations under a contract.

TYPES OF CONSTRUCTION BONDS  

Bid Bonds:

A bid bond is provided as the basic instrument of prequalification.    The bid bond guarantees that the contractor will enter into a contract if one is offered, and will furnish whatever additional bonds are specifically required.  If the contractor fails to do either, the bid bond specifies a penalty which may be paid as damages.        

Performance Bonds:

The performance bond guarantees that the contractor will build the Project in accordance with the contract plan and specifications.  In case of failure, the owner has a right of action against the surety to secure the completion of the project. 

Payment Bonds:

The payment bond guarantees that those people supplying labor and materials on the project will be paid subject to restrictions and limitations imposed by statute.

Maintenance Bonds:

This bond guarantees that the contractor will remedy any unsatisfactory work or replace defective materials.  Most construction contracts require this guarantee.  Often, the performance bond will include this guarantee or the company supplying the performance bond will also supply the required maintenance bond without additional charge.

Design/Build:

In a design-build contract, the owner is looking for a single source delivery of design and construction services.  You, as a design Contractor, need to be aware of the potential for design liability assumed under your contracts and therefore, your performance bond.  Your surety company may be considered the “deep pocket” for professional liability claims under your bond.  Comprehensive design-risk management should include review and modification of performance bond guarantees, in addition to comprehensive Contractors errors and omissions insurance.  The performance bond in an inappropriate vehicle for E&O risk financing and it is in the interest of all parties to direct these liabilities to the appropriate risk-financing tool – the E&O insurance policy.  This may be achieved by excluding design performance, errors and omissions  in design, and warranty of design from the bond guarantee through language in the performance bond or the underlying design-build contract.  This contract should also make a clear distinction between the contract price for design services and the contract price for construction services.  The amount of the performance bond should be based upon the construction portion only giving the owner the usual surety guarantees for construction performance while protecting itself from design negligence and E&O through the insurance requirement.

MANY OTHER BONDS AVAILABLE 

• Retention Bonds
• Sales and Use Tax Bonds
• License and Permit Bonds
• Health and Welfare Bonds
• Financial Guarantee Bonds
• Fidelity Bonds
• Lien Bonds
• Liquor License Bonds
• Mercantile and Governmental Entity Bonds
• Financial Institution Bonds
• Judicial Bonds
• Public Official Bonds
• Lien Bonds

home | about us | news | events | quick logins | online forms | property & casualty
risk management | employee benefits | financial services | personal lines | contact us
employment | site map | search

Copyright© 2004 All Rights Reserved McQueary Henry Bowles Troy, LLP