Surety Bond
A surety bond is an accessory contract: an authorized surety company commits to pay the beneficiary (the project owner) a set sum if the contractor —the principal— fails to perform as agreed. It does not replace the obligation of the contractor, it backs it; that is why the surety can later recover from the contractor whatever it pays out.
A project typically involves three bonds. The advance payment bond guarantees the proper use or return of the money handed over up front at the start; it is usually issued for 100% of the advance and is released as the advance is amortized through the progress payments. The performance bond secures that the work is carried out in line with the contract, schedule, and specifications; it is commonly set at around 10% of the contract amount. The warranty bond (also called a maintenance bond) covers defects or failures that surface once the work has been accepted, during the guarantee period that follows handover.
On public works, these guarantees are mandatory under public procurement law, and if they are missing or expired, payments can be withheld or the contract terminated. The advance payment and performance bonds are submitted before funds are received or work begins; the warranty bond is provided at final settlement and normally stays in force for 12 months after physical acceptance of the work.
Example
A construction contract for $10,000,000 with a 30% advance. The contractor provides: an advance payment bond of $3,000,000 (100% of the advance), a performance bond of $1,000,000 (10% of the contract), and, at final settlement, a warranty bond of $1,000,000 (10%) in force for 12 months after acceptance.
Frequently asked questions
What types of surety bond are used on a construction project?
The three most common are the advance payment bond (guarantees the proper use or return of the advance), the performance bond (secures that the work is carried out in line with the contract), and the warranty bond (covers defects that appear after the work is accepted).
How much is the performance bond on public works?
It is commonly set at around 10% of the total contract amount. The advance payment bond is usually issued for 100% of the advance granted, and the warranty bond for around 10% of the amount executed.
What is the difference between a performance bond and a warranty bond?
The performance bond guarantees that the work is completed in line with the contract and is in force during execution; the warranty bond covers defects or failures that appear after the work is accepted, during the guarantee period (normally 12 months).