Construction Bonds 101: What Contractors Must Know Before Signing

In construction, especially on public works projects, you can’t rely on mechanics liens to protect your right to payment. Government immunity takes that tool off the table. That’s why, in Quit Getting Screwed, I break down another critical layer of protection: payment and performance bonds. These bonds can be the difference between finishing a job and walking away empty-handed.

Today, I’ll walk you through exactly how bonds work, why they’re required on public projects, and what every subcontractor needs to know before signing on the dotted line. Because while bonds protect against non-payment and incomplete work, they also come with serious responsibilities—and sometimes, personal financial risk.

You’ll hear:

• Why bonds replace liens on public projects and how they actually function.

• The difference between performance bonds and payment bonds—and why you might need both.

• Why bonds aren’t insurance and what happens when a claim is paid out.

• Practical tips to protect yourself before you step onto a bonded job.

Key Takeaways

1. Bonds act as security on construction projects, particularly public works where filing a lien is not allowed. They ensure parties like subcontractors and suppliers have a means of getting paid if issues arise, by enabling them to file claims against the bond rather than the property itself.

2. On public projects, general contractors are typically required to obtain both performance and payment bonds. A performance bond guarantees completion of the contracted work, while a payment bond guarantees that all suppliers and laborers are paid, providing financial protection to all parties involved.

3. Bonds are not insurance; if a bond company pays out a claim, they will seek reimbursement from the contractor or subcontractor who secured the bond. This makes bonds a significant personal and financial liability, not a simple protective policy like insurance.

4. Subcontractors must understand the serious obligations that come with obtaining a bond. If a claim is filed and paid out, the bond company will come after them for reimbursement. It’s crucial to be aware of what’s being guaranteed and to only secure bonds for the remaining contract amount if required during the course of work.

5. Subcontractors should always obtain a copy of the general contractor’s bond before starting work, as it allows them to file a claim if unpaid. Additionally, building a relationship with the bond company/agent can prove beneficial if issues arise, providing an opportunity to defend against unjust claims before any payout.

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