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What is a Contract Bond?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 28 October 2016
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    Conjecture Corporation
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A contract bond is one form of the performance bond issue that serves as a guarantee that all the terms and provisions found in a contractual agreement will be fulfilled. This type of bond issue is often used in conjunction with another kind of performance bond that is known as a payment bond. Between the two issues, customers are protected from the possibility of losses due to the failure of a provider to deliver the services promised in the contract. This includes eliminating the potential for losses that have to do with the consumption of materials and labor as part of a project that is ultimately not completed for some reason.

Sometimes known as a contractor performance guarantee, a contract bond is a common type of document prepared within the construction industry. In many cases, the bond is prepared by a surety company at the request of the main contractor associated with the project. There are also instances in which a subcontractor associated with a given construction project will also take out this type of bond, safeguarding against the potential for the deal to fall through after some time and resources have been invested in the project.

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The scope of coverage provided within the contract bond will vary, based on the provisions found in the construction contract itself. Typically, the bond does aid in offsetting expenses such as labor costs as well as any materials that have already been used in the construction project. In some cases, the coverage extends to cover materials that have not been used in the construction up to the date of the default, if those materials cannot be returned for a full credit and there is little to no chance of being able to divert the unused materials and their costs to a different pending project. In addition, trade laws that apply to the construction industry in the area in which the building activity is taking place will have some impact on the exact terms of the contract bond.

Construction professionals often secure a contract bond for any type of construction project that involves a significant amount of investment in terms of labor or capital. Typically, obtaining this type of bond is to the benefit of both the contractor and the customer. In the event that the customer experiences some type of unforeseen disaster that makes continuing the project impractical, the terms of the bond will help to reimburse the contractor for his or her investment in the project, minimizing the possibility of the contractor taking legal action against the customer. Since the contractor has at least recovered the costs involved in the project up to that point, and had likely received some type of non-refundable advance from the customer before construction began, the contract bond allows the deal to be concluded amicably and without the need for any further legal action on the part of the contractor.

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