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 Arizona, construction bonds are a critical component of the construction industry, serving as a risk management tool to ensure project completion and financial security. These bonds are regulated by state statutes and may also be influenced by federal law, particularly on federally-funded projects. The three main types of contract surety bonds used in Arizona are: 1) Bid Bonds, which ensure that a contractor will enter into a contract if awarded the bid and provide subsequent performance and payment bonds; 2) Performance Bonds, which guarantee that a contractor will perform the obligations of the contract; and 3) Payment Bonds, which assure that a contractor will pay subcontractors and suppliers. These bonds protect the project owner (obligee) from losses due to a contractor's (principal's) failure to fulfill their contractual obligations, with the surety company backing the contractor's promises. In Arizona, public construction contracts generally require these bonds, and they may also be required on private projects depending on the contract terms. An attorney with experience in construction law can provide specific guidance on the requirements and implications of these bonds in Arizona.