What bonds are used in the construction industry?

Most contractors working on public projects, and even some private projects, are familiar with surety bonds. This contract is between the obligee, or the recipient of the obligation; the principal party, who will pay for the contracted obligation; and the surety. It is a promise by the surety to pay the obligee if the principal fails to meet their obligation.

But in the construction industry, there are other bonds that may be required in a contract. Below are three of the less common bonds and how they work.

Guaranty bond

A guaranty bond is one in which the amount of money and the interest are guaranteed by someone other than the person who gave it. These bonds are used often in relation to large investments and help secure payment and performance.

Completion bond

A completion bond is a financial contract that ensures a given project will be completed, even if the contractors runs out of funds or if any measure of financial impediment occurs during the production of the project. These bonds are most common in the entertainment industry, so if a construction project is part of a film or other type of artistic endeavor, a completion bond may be used.

Lien bond

A lien bond is often used by a property owner to remove a lien that was recorded against their property. This is necessary when the owner needs to sell the property or refinance a loan secured by the property but cannot do so because the construction lien is clouding their title to the property. Liens can often be a source of dispute in the construction industry, so understanding how they work is important for anyone working on a contracted project.