What is the Purpose of a Contract Bond?

Contract bonds are commonly used in public, private, and construction projects to establish contractor credibility, and to financially compensate project owners if a contract falls into default.

In this guide, we explore the different types of contract bonds available from Lance Surety, why they’re important, and how they protect all parties involved in project work.

What is a Contract Bond?

A contract bond is a surety bond that gives a project owner financial protection if a contractor does not complete work as agreed. It is commonly used in construction projects, private contracting, and public building works.

Contract bonds are not the same as contractor insurance. Bonds ensure project owners or authorities are compensated if work defaults, whereas insurance protects the contractor or business against loss.

Bonds are frequently legally required, for example, should the Miller Act apply, which states construction projects worth more than $100,000 must be bonded. Interpretations vary, too, by state. 

Parties Involved in a Contract Bond

Contract bonds involve three parties - the principal, the obligee, and the surety:

• The principal is the contractor in the agreement, who obtains the bond.
• The obligee is the project owner, manager, or contracting authority. They request the principal obtain a bond before work begins.
• The surety is a company that provides bonds to contractors (e.g., Lance Surety). They assess the principal’s financial competence and eligibility to take on any contract bonds requested.

As part of the contract bonding process, the principal agrees to indemnify, or reimburse, the costs of any losses as determined by the obligee should they fail to carry out their work. Should the principal default, the surety acts as their guarantor so that the obligee receives the compensation they are legally entitled to.

Types of Contract Bonds

Principals may be required various types of contract bonds before starting work, including:

• Bid bonds, which guarantee contractors will honor their bid and fulfill duties at financial amounts agreed.
• Payment bonds, which ensure contractors make all payments due to any subcontractors they enlist or work with.
• Maintenance bonds, or warranty bonds, which guarantee delivered projects will withstand a specific amount of time after completion.
• Performance bonds, which effectively guarantee a project against failure or non-fulfillment. 

What Is the Purpose of a Contract Bond?

Contract bonds ensure that contractual obligations are fulfilled and that project owners are protected from costly defaults. It is a legal, financial guarantee that acts as an extra “promise” that a contractor can be trusted.

Contracted work that is delayed or even completely unfulfilled can lead to obligees wasting unnecessary time and money, and potentially put members of the public at risk. Studies show that construction projects are increasingly delayed or poorly forecasted, meaning obligees need greater financial protection than ever:

“Large construction projects typically run 20% behind schedule and can experience budget overruns as high as 80%. 

In North America specifically, the situation remains challenging. 98% of construction projects face delays, with the average project duration extending 37% longer than originally projected.”

Ghazaryan, A., and Melkonyan, T.

Contract bonds help project owners to bounce back faster from defaults and therefore find replacement contractors where appropriate. Therefore, any risks to public works or public health and safety are mitigated.

Benefits of Contract Bonds

The main benefit of contract bonds is the financial security and reduced risk they offer to project owners. However, they also benefit contractors by boosting their credibility and building a trustworthy profile.

Contractors rely on building credibility and reputation to secure future contracts. However, given the risks that obligees face when working with new contractors, it is not always easy for them to gain this foothold.

A contractor that is willing to obtain a contract bond, successfully apply, and carry out the work expected of them, is likely to build favor both with the initial obligee and future prospects.

Conclusion: Why Contract Bonds Matter

Contract bonds give project owners reassurance that their contractors’ work is guaranteed. They also help to build trust in contractors and ensure there is clear accountability over projects.

Obtaining a contract bond for any size of project doesn’t need to be a hassle. Start an online application with Lance Surety today and start building the credibility you know you can provide.

Sources

(n.d.). In Lance Surety Bonds. Retrieved January 22, 2026, from
https://www.lancesuretybonds.com/blog/types-of-contract-bonds

Bid Bonds. (n.d.). In Lance Surety Bonds. Retrieved January 22, 2026, from
https://www.lancesuretybonds.com/contract-bonds/bid-bonds

Contract Bonds. (n.d.). In Lance Surety Bonds. Retrieved January 22, 2026, from
https://www.lancesuretybonds.com/contract-bonds

Ghazaryan, A. (2025). Project Delays in Construction: Key Metrics for 2026. In Buildern resources. Buildern resources.
https://buildern.com/resources/blog/project-delays-in-construction

Maintenance Bonds. (n.d.). In Lance Surety Bonds. Retrieved January 22, 2026, from
https://www.lancesuretybonds.com/contract-bonds/maintenance-bonds

Online Surety Bond Application. (n.d.). In Lance Surety Bonds. Retrieved January 22, 2026, from
https://www.lancesuretybonds.com/surety-bond-quote

Payment Bond. (n.d.). In Lance Surety Bonds. Retrieved January 22, 2026, from
https://www.lancesuretybonds.com/contract-bonds/payment-bonds

Performance Bond. (n.d.). In Lance Surety Bonds. Retrieved January 22, 2026, from
https://www.lancesuretybonds.com/contract-bonds/performance-bonds

The Miller Act. (August 2009). gsa.gov. Retrieved January 22, 2026, from
https://www.gsa.gov/system/files/miller_brochure.pdf