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

Loading the player...
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. Performance Bond

    A bond issued to one party of a contract as a guarantee against ...
  5. Guarantor

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

    The guarantee of the debts of one party by another. A surety ...
RELATED FAQS
  1. Who are GoDaddy's (GDDY) main competitors?

    GoDaddy (GDDY) is the leading domain registrar in the world. The company also offers Web hosting and has millions of websites ... Read Full Answer >>
  2. What are the major barriers to entry for new companies in the drugs sector?

    Pharmaceutical companies face infamously high barriers to entry in the United States. Many economics and business textbooks ... Read Full Answer >>
  3. What's a good forex strategy to use when spotting a Wedge-shaped Pattern?

    Use wedge-shaped patterns to identify bullish or bearish price action when trading currencies in the foreign exchange (forex) ... Read Full Answer >>
  4. Why should investors research the C-suite executives of a company?

    C-suite executives are essential for creating and enacting overall firm strategy and are therefore an important aspect of ... Read Full Answer >>
  5. What is a "linear" exposure in Value at Risk (VaR) calculation?

    A linear exposure in the value-at-risk, or VaR, calculation is represented by positions in stocks, bonds, commodities or ... Read Full Answer >>
  6. What happens when a company defaults on its commercial paper obligations?

    As a practical matter, the Issuing and Paying Agent, or IPA, is responsible for reporting the commercial paper issuer's default ... Read Full Answer >>
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. Investing Basics

    Explaining Write-Downs

    A write-down is a reduction in the book value of an asset because it is overvalued compared to the market value.
  6. Credit & Loans

    What is an Unsecured Loan?

    An unsecured loan is based on the creditworthiness of the borrower, and has no collateral securing the loan.
  7. Investing Basics

    Understanding Open-End Funds

    An open-end fund is a type of mutual fund that does not limit the amount of shares it issues, but issues as many shares as investors are willing to buy.
  8. Investing Basics

    What is a Nominal Value?

    The nominal value of a security, such as a stock or bond, remains fixed for the duration of its life.
  9. Economics

    Explaining the Human Development Index

    The Human Development Index (HDI) is a metric developed by the United Nations to take the emphasis off economic growth and focus on human wellbeing.
  10. Fundamental Analysis

    Calculating Future Value

    Future value is the value of an asset or cash at a specified date in the future that is equivalent in value to a specified sum today.

You May Also Like

Hot Definitions
  1. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
  2. Moving Average - MA

    A widely used indicator in technical analysis that helps smooth out price action by filtering out the “noise” from random ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Productivity

    An economic measure of output per unit of input. Inputs include labor and capital, while output is typically measured in ...
  5. Variance

    The spread between numbers in a data set, measuring Variance is calculated by taking the differences between each number ...
  6. Terminal Value - TV

    The value of a bond at maturity, or of an asset at a specified, future valuation date, taking into account factors such as ...
Trading Center