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 Tennessee, construction bonds are a critical component of the construction industry, serving as a risk management tool to ensure project completion and financial security. The three main types of contract surety bonds used in construction are bid bonds, performance bonds, and payment bonds. A bid bond ensures that a contractor will enter into a contract and provide the necessary performance and payment bonds if they win a bid. A performance bond safeguards the project owner from losses if the contractor fails to fulfill the contract terms, allowing the owner to claim compensation from the surety. Lastly, a payment bond guarantees that the contractor will pay their subcontractors and suppliers. These bonds are often required by law for public construction projects in Tennessee, and the specific requirements can be found in the Tennessee Code Annotated (T.C.A.), particularly in sections related to public works and construction. Private project owners may also require these bonds to protect their investments. The exact bond requirements, including the bond amount and conditions, can vary depending on the project size, type, and other factors.