Construction Bonds

By: Zuneera Ashfaq

Definition

Contract bonds are guarantees that a contractor will

abide by the specifications of a construction contract.
A construction bond assures a project owner that a
contractor will perform the work properly and pay
specified subcontractors, laborers and material
suppliers.
Types of bonds

Bid Bond
Performance bond
Payment bond
Bid Bond

The bid bond is issued to give assurances that the

contractor will enter into a binding construction
contract and will provide the required payment and
performance bonds if the contract is awarded to him
or her.
If, however, the selected bidder cannot or will not
enter into contract, the bid security is forfeited, and
award is made to the next bidder in line on the same
basis.
The value of the bid bond is usually set to about 5-20%
of the contract amount.
Performance bonds

It assures that a financially responsible party will stand

behind the prime contractor if he or she does not
perform properly
It is not an absolute guarantee that the project will be
built as per the contract
This bond simply insures that the contractor will be
backed to the limit of the amount of contract.
These bonds usually have value equal to 100% of
contract amount.
Payment Bond

A payment bond gives protection to the owner if the

subcontractor and suppliers are not paid by the prime
contractor.
The sub contractors are paid by the surety if the main
contractor fails to pay for their work.
Construction
Delays
Construction Delay

Construction delays are considered as time lag in

completion of activities from its specified time as per
contract or can be defined as late completion or late
start of activities to the baseline schedule, directly
affecting specified cost.
As a result, there will be extensions of time required
which will further result in fine, increased cost due to
inflation, termination of contract, court cases etc. or
combinations of above stated factors, resulting in
delay damages.
Liquidated damages for
delay
On many projects, where time is the essence of construction,
the owner and the contractor agree under the contract
terms that if the contractor fails to complete the project by
the stipulated date, it is financially liable to the owner for a
pre agreed sum for each day beyond the specified
completion date that it takes the contractor to finish the
work.
This amount of money represents the financial losses to the
owner for such delays, and because it is difficult to
determine the real values of the owners losses, the pre
agreed sum is used in lieu of a determination of the actual
damages suffered.
This assessment is referred to as liquidated damages, and it is
common practice throughout the construction industry to
require that the contractor pay the owner this fixed sum of
money for each calendar day that it exceeds the specified
date of completion.
Bonus Clause

According to this clause the contractor is given a

certain amount in bonuses if he/she completes the
project before the duration mentioned in the
contract.
Acceleration of Work

It can occur in two ways

Actual acceleration it consist of direct order by the
owner to hire additional workers, work overtime or work
extra shifts on the project
Constructive acceleration not the result of direct order. It
is because of the reason that the owner does not allow
for time extension
Suspension of work

The suspension of work provision is the contractual

equivalent of a breach of contract action for delays.
Suspension clauses are seldom included in the private
contracts.
Most contracts contain the provision which grants
owner the power to suspend the work if the contractor
is not performing as per the specifications.
Another reason for the suspension of work can include
the discovery of historical or archaeological artifacts.
Termination

Provisions for termination of construction are included

in most of the contracts and it occurs in two varieties.
Termination for default of the contractor
Termination for convenience of the owner
In termination for default of the contractor the owner
lists the conditions under which the owner will
terminate the contract and make a claim against the
contractor. These provisions generally provide serious
consequences for the contractor such as the
payment to the contractor can be stopped.
In termination for convivence the owner reserves the
right to terminate the contract at any time regardless
the percentage of completion of project