A construction bond is a type of surety bond. A surety bond is a three-party contract that includes the surety (company that guarantees performance); the principal (contractor); and the obligee (owner). The Principal promises to perform its contract obligations to the obligee (owner), and the surety guarantees the principal’s performance of its obligations by paying the obligee if the principal fails to meet its obligations. Surety bonds used in construction are called contract surety bonds.

There are 3 types of contract surety bonds:

1. Bid Bond. A bid bond provides financial protection to an obligee (owner) if a bidder is awarded a contract based on bid documents, but fails to sign the contract and provide the required performance and payment bonds. The bid bond helps screen out unqualified bidders and is an important part of the competitive bidding process on some construction projects.

2. Performance Bond. A performance bond protects the obligee (owner) from financial losses if the contractor fails to perform the construction contract according to its terms. If the obligee (owner) declares the principal (contractor) in default and terminates the construction contract, the obligee can demand the surety meet the surety’s obligations under the terms of the bond.

3. Payment Bond. A payment bond guarantees the contractor’s payment of subcontractors and material suppliers.

In Arkansas, construction bonds are a critical component of the construction industry, serving as a risk management tool to ensure project completion and financial security. The state statutes and federal law require these surety bonds for public construction projects to protect the interests of the project owner (obligee). A bid bond is necessary during the bidding process to ensure that a contractor can and will obtain performance and payment bonds if awarded the contract. A performance bond is required to safeguard the project owner from losses if the contractor (principal) fails to fulfill the contract terms. Lastly, a payment bond ensures that subcontractors and suppliers are paid, thus protecting the project owner from potential liens against the property. These bonds are typically required by law for public projects above a certain monetary threshold, and while the Miller Act governs federal projects, Arkansas has its own Little Miller Act that stipulates similar requirements for state-funded construction projects.