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 Hawaii, 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 under both state statutes and federal law, depending on the nature of the construction project. The three main types of contract surety bonds used in Hawaii are bid bonds, performance bonds, and payment bonds. A bid bond ensures that a contractor will enter into a contract if awarded the bid, while a performance bond guarantees the contractor's performance in accordance with the contract terms. A payment bond, on the other hand, ensures that subcontractors and suppliers are paid by the contractor. These bonds are often required for public construction projects in Hawaii, and the requirements may vary based on the project's value and the type of public entity involved. Contractors must secure these bonds from a surety company licensed to operate in Hawaii, and the terms of the bonds are typically outlined in the contract documents. Failure to comply with the bond requirements can result in legal consequences for the parties involved.