Construction Bond

AAA

DEFINITION of 'Construction Bond'

A type of surety bond used by investors in construction projects to protect against an adverse event that causes disruptions, failure to complete the project due to insolvency of the builder(s), or the job's failure to meet contract specifications.


There are generally three parties involved in a construction bond – the party or parties building the project, the investor/eventual owners, and the surety company that backs the bond.


May also be called a "construction surety bond" or a "contract bond".

INVESTOPEDIA EXPLAINS 'Construction Bond'

Many things can go wrong in a large construction project. Because of this, construction bonds are almost a mandatory prerequisite of any project beyond a certain size, and for most (if not all) government and public works projects.


On larger projects, construction bonds may come in portions; one to protect against overall job completion and to specifications and another to protect against the cost of materials from suppliers and subcontractors.


Surety companies will evaluate the financial merits of the principal builder and charge a premium according to their calculated likelihood that an adverse event will occur.

VIDEO

RELATED TERMS
  1. Maintenance Bond

    A type of surety bond purchased by a contractor that protects ...
  2. Completed Operations Insurance

    An insurance product that covers the liability incurred by a ...
  3. Completion Bond

    A financial contract that insures a given project will be completed ...
  4. Guarantor

    A person who guarantees to pay for someone else's debt if he ...
  5. Surety

    The guarantee of the debts of one party by another. A surety ...
  6. Performance Bond

    A bond issued to one party of a contract as a guarantee against ...
Related Articles
  1. Home & Auto

    The History Of Insurance

    The first written policy appeared in Hammurabi's Code. Find out how it evolved from there.
  2. Entrepreneurship

    Identifying And Managing Business Risks

    There are a lot of risks associated with running a business, but there are an equal number of ways to prepare for and manage them.
  3. Bonds & Fixed Income

    A Guide To Real Estate Derivatives

    These instruments provide exposure to the real estate market without having to buy and sell property.
  4. Retirement

    The Evolution Of Enterprise Risk Management

    This growing sector can tell you a lot about the companies you are investing in.
  5. Chart Advisor

    ChartAdvisor for December 19 2014

    A weekly technical summary of the major U.S. indexes.
  6. Trading Strategies

    What does a double bottom tell a trader about the overall trend?

    Learn how a double bottom pattern forms on a price chart and why many traders consider double bottoms to be a sign of reversal in the price trend.
  7. Trading Strategies

    What are the main differences between a double top and a double bottom?

    Identify double tops and double bottoms, and learn what each could mean for the security's current price trend. Discover how other indicators verify movements.
  8. Technical Indicators

    What are common trading strategies used when identifying a double bottom

    Use simple, low-risk trading strategies to take advantage of a double bottom formation. Traders typically take one of these approaches to buying the market.
  9. Forex Strategies

    What are the most common divergence strategies implemented in forex trading?

    Discover common divergence strategies that utilize either stochastics or the MACD, the two most frequently used momentum indicators in forex trading.
  10. Technical Indicators

    What is a common price target when identifying a double bottom?

    Learn how to identify a double bottom stock pattern and where to set a target selling price point to get the most out of your investment.

You May Also Like

Hot Definitions
  1. Deferred Revenue

    Advance payments or unearned revenue, recorded on the recipient's balance sheet as a liability, until the services have been ...
  2. Multinational Corporation - MNC

    A corporation that has its facilities and other assets in at least one country other than its home country. Such companies ...
  3. SWOT Analysis

    A tool that identifies the strengths, weaknesses, opportunities and threats of an organization. Specifically, SWOT is a basic, ...
  4. Simple Interest

    A quick method of calculating the interest charge on a loan. Simple interest is determined by multiplying the interest rate ...
  5. Special Administrative Region - SAR

    Unique geographical areas with a high degree of autonomy set up by the People's Republic of China. The Special Administrative ...
  6. Annual Percentage Rate - APR

    The annual rate that is charged for borrowing (or made by investing), expressed as a single percentage number that represents ...
Trading Center