Construction Bonds Protect the Owner and the Subcontractors and Suppliers
Surety bonds are three-party agreements where a surety company guarantees that a contractor (the principal) will fulfill specific obligations to an owner (the obligee). If the contractor defaults, the surety steps in to fulfill the obligation or compensate the owner for losses. Construction bonds are common on public projects (often required by law) and on private projects where owners want protection against contractor default. The ARE CE exam tests surety bonds because they are procurement and contract documents that the architect helps the owner understand and administer.
Bid Bond
A bid bond guarantees that a bidder, if selected as the lowest responsible bidder, will enter into the contract and furnish any required performance and payment bonds. If the bidder fails to do so (walks away after winning the bid), the surety pays the owner the difference between the winning bid and the next lowest bid, up to the bond penalty (typically 5–10% of the bid amount). Bid bonds protect owners from "bid shopping" and contractors who submit unrealistically low bids with no intention of performing. Bid bonds are standard on public bidding and commonly required on private projects with competitive bid procurement.
Performance Bond
A performance bond guarantees that the contractor will complete the contract in accordance with the contract documents. If the contractor defaults (abandons the project, fails to make progress, or is terminated for cause), the surety has several options: take over the contract and complete it using another contractor; allow the owner to complete the work and reimburse costs up to the bond amount; or negotiate a financial settlement. Performance bonds are typically 100% of the contract sum. They protect the owner's investment in the project and ensure that the work is completed even if the original contractor cannot finish it.
Payment Bond (Labor and Material Bond)
A payment bond guarantees that the contractor will pay all subcontractors, suppliers, and laborers who contribute to the project. If the contractor fails to pay, these parties can make a claim against the payment bond rather than filing a mechanic's lien against the owner's property. Payment bonds are particularly important on public projects, where mechanic's liens cannot be filed against public property - the payment bond serves as the substitute remedy for unpaid subcontractors and suppliers. On private projects, payment bonds reduce the owner's risk of having the project encumbered by liens from unpaid parties. Payment bonds are typically 100% of the contract sum (same bond amount as performance bonds).
AIA Document A312
AIA Document A312 is the standard form for construction performance and payment bonds. It is typically used with AIA owner-contractor agreements. The bond is executed simultaneously with the contract agreement.
Miller Act (Federal Projects)
The Miller Act (40 U.S.C. §§ 3131–3134) requires performance and payment bonds on all federal construction contracts over $150,000. Most states have "Little Miller Acts" with similar requirements for state and local government projects, often at lower thresholds. This is why competitive public bidding almost always requires all three bond types.
Key Exam Points
- Bid bond: guarantees bidder will enter into contract if selected; typically 5–10% of bid amount.
- Performance bond: guarantees contract completion; typically 100% of contract sum.
- Payment bond: guarantees payment to subcontractors and suppliers; substitute for mechanic's liens on public projects.
- AIA A312: standard bond form for construction projects.
- Miller Act: requires performance and payment bonds on federal contracts over $150,000.
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