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 Michigan, construction bonds are a common requirement for public construction projects and may also be used in private projects. These bonds are a form of surety bond involving three parties: the surety (company guaranteeing performance), the principal (contractor), and the obligee (owner). The principal is obligated to fulfill the contract terms, and the surety ensures this performance by compensating the obligee if the principal fails to meet its obligations. There are three main types of contract surety bonds used in construction: (1) Bid Bond, which ensures that a contractor will enter into a contract if awarded the bid and provide the necessary performance and payment bonds; (2) Performance Bond, which secures the obligee against losses if the contractor does not perform according to the contract; and (3) Payment Bond, which assures that the contractor will pay subcontractors and suppliers. These bonds are regulated by state statutes and federal laws, including the Michigan Public Works Bond Act (Act 187 of 1905) and the Federal Miller Act for federal projects. Contractors must comply with these regulations to participate in construction projects within Michigan.