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 Rhode Island, construction bonds are a critical component of the construction industry, serving as a risk management tool to ensure project completion and financial security. These surety bonds involve three parties: the surety (company providing the bond), the principal (contractor), and the obligee (project owner). Rhode Island, like other states, recognizes the importance of these bonds in safeguarding the interests of project owners against contractor default. The three main types of contract surety bonds used in construction are: 1) Bid Bonds, which ensure that a contractor awarded a project will sign the contract and provide the necessary performance and payment bonds; 2) Performance Bonds, which protect the owner from losses if the contractor fails to fulfill the contract terms; and 3) Payment Bonds, which guarantee that the contractor will pay subcontractors and suppliers. These bonds are often required by law for public construction projects in Rhode Island, and may also be used in private projects to provide a level of security for project owners.