A contract bond is drawn to provide guarantee for a specific contract. Contract bonds or construction bonds, are any form of bond required by a contractor for construction. Contract surety bonds include the following:
A bid bond provides financial assurance that the bid has been submitted in good faith. A performance bond is required by the obligee to protect financial loss in the scenario where the contractor is unable to perform the contract as per its terms and conditions. A payment bond assures that all the payments will be made by the contract to suppliers, laborers, and subcontractors working on the project. A maintenance bond guarantees against poor or defective workmanship and materials for a prescribed time period. Subdivision bonds act as an assurance that the principal will finance and construct improvements in the interest of public.
Aside from contract bonds there are also commercial bonds which include license and permit bonds, judicial bonds, probate or fiduciary bonds, public official bonds, federal bonds and other miscellaneous bonds.
The costs of surety bonds vary and there is no fixed amount. Surety bond premiums generally are between half percent to two percent of the contract amount. The premium also depends on size, credit, type, and duration of the project. An important term in nearly every surety bond is the penal sum. Penal sum is the specified amount of money which is the maximum limit to which the surety will be required to pay in the event of the principal�s default. This gives the surety an idea about the extent of risk involved in giving the bond.
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Surety Bonds are an alternative way to have investment pumped into personal or commercial ventures and they often provide a great deal more value than long term loans.