Careers Business Ownership 9 Essential Bonds and Insurance for Construction Companies Print Business Ownership Industries Construction Retail Small Business Restauranting Real Estate Nonprofit Organizations Landlords Import/Export Business Freelancing & Consulting Franchises Food & Beverage Event Planning eBay E-commerce Operations & Success Becoming an Owner By Juan Rodriguez Juan Rodriguez University of Puerto Rico DeVry University Juan Rodriguez is a former writer with The Balance who covered large-scale construction. He is an engineer with experience managing and overseeing large civil works construction. Learn about our Editorial Process Updated on 11/20/19 If you are doing work as a contractor, certainly you will be asked to provide some sort of proof of bonding or insurance protecting your customer and your investment. Construction bonds are required on almost every single construction project and in some instances are related to contractual obligations. Understanding construction bonds is an essential area that you must dominate to be able to get the best deals from sureties and insurance companies. Here is a list of the most common construction bonds required as part of all construction contracts 01 of 09 Bid Bond Joe Raedle/Getty Images News A bid bond is a guarantee that you provide to the project owner stating that you have the capability to take on and implement the project once you are selected during the bidding process. However, because of a bid bond, they will be more comfortable awarding a project to a contractor knowing that if the project fails, they can collect compensation from the surety bond. 02 of 09 Performance Bond milanvirijevic / Getty Images A performance bond will protect the owner against possible losses in a case a contractor fails to perform or is unable to deliver the project as per established and the contract provisions. Sometimes the contractor defaults or declares himself in bankruptcy, and then in those situations, the surety is responsible to compensate the owner for the losses. 03 of 09 Hold Harmless Agreements peepo / Getty Images The hold harmless agreement protection will vary depending on the jurisdiction that the contract is being executed. In some cases, the hold harmless agreement will protect the contractor from claims brought by corporations or companies not forming part to the agreement. 04 of 09 Mechanics' Lien ideabug / Getty Images If a subcontractor, contractor, or any other construction agency related to the project that does not have a direct contractual relationship with the owner, they must provide a Preliminary Notice within the established time limits. In most states, the contractor has to provide this notice at least 20 days in advance of putting on the lien. 05 of 09 Payment Bonds Cretì Stefano / Getty Images The payment bond forms a three-way contract between the Owner, the contractor and the surety, to make sure that all subcontractors, laborers, and material suppliers will be paid leaving the project lien free. A Payment Only Bond is rarely requested and is billed usually at about 50% of the regular premium. 06 of 09 Subcontractor Default Insurance BanksPhotos/Getty Images A Subcontractor Default Insurance provides relief for contractors when a subcontractor has its contract terminated by default. This type of insurance provides unique benefits when compared to a traditional default process, that will normally require litigation and delays that will significantly affect contract schedule. A Subcontractor Default Insurance (“SDI”) can be considered as an alternative to surety bonds. 07 of 09 Builder's Risk Insurance Juan Rodriguez The builder's risk insurance policy will pay for damages up to the coverage limit. The limit must accurately reflect the total completed value of the structure (all materials and labor costs, but not including land value). The construction budget is the best source for determining the appropriate limit of insurance. Builder’s Risk insurance policies can often be written in terms of three-months, six-months, or 12-months. 08 of 09 Property Flood Insurance Westend61 / Getty Images Flood insurances are required on high-risk areas as determined by the NFIP and strongly recommended on moderate-to-low risk areas. However, flood insurance is limited on basement and areas below the lowest elevated floor depending on the flood zone and date when it was built. Limited coverage might also be suggested on crawl spaces, enclosed areas beneath elevated buildings and other low-lying areas. 09 of 09 The Miller Act Ezra Bailey / Getty Images The Miller Act requires that every contractor bidding on a federal project has to post a performance bond and a payment bond covering all labor and material. The law is required on contract exceeding $100,000 working or planning to work on any building or property of the United States. The Federal Acquisition Regulation Current could request additional protection or bonds to contractors being contracted between $25,000 and $100,000.