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. The History Of Insurance
    Home & Auto

    The History Of Insurance

  2. Identifying And Managing Business Risks
    Entrepreneurship

    Identifying And Managing Business Risks

  3. A Guide To Real Estate Derivatives
    Bonds & Fixed Income

    A Guide To Real Estate Derivatives

  4. Introduction To Bonds
    Investing

    Introduction To Bonds

comments powered by Disqus
Hot Definitions
  1. Last In, First Out - LIFO

    An asset-management and valuation method that assumes that assets produced or acquired last are the ones that are used, sold ...
  2. Ghosting

    An illegal practice whereby two or more market makers collectively attempt to influence and change the price of a stock. ...
  3. Elasticity

    A measure of a variable's sensitivity to a change in another variable. In economics, elasticity refers the degree to which ...
  4. Tangible Common Equity - TCE

    A measure of a company's capital, which is used to evaluate a financial institution's ability to deal with potential losses. ...
  5. Yield To Maturity (YTM)

    The rate of return anticipated on a bond if held until the maturity date. YTM is considered a long-term bond yield expressed ...
  6. Net Present Value Of Growth Opportunities - NPVGO

    A calculation of the net present value of all future cash flows involved with an additional acquisition, or potential acquisition. ...
Trading Center