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 Oregon, 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's regulations require contractors to obtain these surety bonds for public works projects over a certain amount, as specified in the Oregon Revised Statutes (ORS) 279C.380 to 279C.390. The three main types of contract surety bonds used in Oregon 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 secure the contractor's obligation to perform according to the contract's terms, with the surety covering costs if the contractor defaults; and 3) Payment Bonds, which guarantee payment to subcontractors and suppliers, ensuring that all parties involved in the construction process are compensated. These bonds are essential for protecting the interests of project owners (obligees) against the potential default or financial insolvency of contractors (principals).