Construction Contract Bonds
A Bid or Proposal Bond is often required when construction contracts are to be let out for bids. The successful bidder is expected to furnish the necessary Performance and/or Payment Bond in order to start work on the project. Default results when the lowest bidder does not obtain the Performance and/or Payment Bond to enter into the contract. The coverage under the Bid and Proposal Bond is limited to the difference between the successful bid and the next low bidder that can qualify for the contract, subject to the limit of the bond.
Performance bonds are many times a requirement for companies wishing to compete for federal or state government contracts. There are also cases where private construction contracts require performance bonds to ensure their interests. Below are listed some of the basic requirements for the most common situations requiring performance bonds.
- For a federal construction project under The Miller Act (40 U.S.C., Sections 3131-3134);
- Public work for Texas governmental entities (when the contract is in excess of $100,000) under Government Code, Chapter 2253;
- An owner may also request a Performance Bond for private work. The Performance Bond coverage guarantees that the principal will faithfully perform the terms and conditions of the written contract.
Maintenance Bonds or Maintenance Guarantees for a term of up to 12 months are normally included with the Performance Bonds. Separate Maintenance Bonds may also be executed where no Performance Bond is required. The coverage provided by a Maintenance Bond is a guarantee against defective workmanship and materials.
Payment or Labor
A Payment or Labor and Material Bond is also required for:
- Federal construction projects (The Miller Act);
- When a contract is in excess of $25,000 for public work (Government Code, Chapter 2253);
- Private work under Property Code, Chapter 53. The coverage provided by the Payment or Labor and Materials Bond guarantees that the contractor will pay for labor and material used to complete the project that is the subject of the contract. When both a Performance Bond and Payment Bond are required, they are issued for limits in the amount of the contract.