Completion Bonds

Completion bonds are essential for construction projects, guaranteeing that a project will be finished on time, within budget, and without financial risk to lenders or investors. This guide explains what completion bonds are, how they work, and why they’re important in construction.

A completion bond is a surety bond that guarantees the full completion of a construction project. It ensures that if the contractor or developer fails to finish the project, the surety will step in to provide financial resources or management support to complete it.

Purpose:

• Protect lenders and investors from financial loss
• Guarantee timely project completion
• Mitigate risks from contractor insolvency, mismanagement, or delays

Completion bonds differ from performance bonds, which only guarantee that specific contractual work is completed to required standards. A completion bond covers the entire project.

A completion bond guarantees that a construction project will be finished on time, within budget, and to specification. It involves three main parties: 

• The principal (contractor or developer)
• The obligee (project owner, lender, or investor)
• The surety (bonding company).

The process begins with the principal submitting detailed project plans, budgets, and financials for the surety’s review. The surety assesses risks, contractor experience, and project feasibility before issuing the bond and monitoring the project throughout its duration.

If the project encounters delays or financial challenges, the surety can step in, providing additional funds, replacing contractors, or managing the completion process to protect the obligee’s investment. Any funds advanced or actions taken by the surety must be reimbursed by the principal under the bond agreement.Premiums are typically calculated as a percentage of the total project cost, reflecting the complexity and risk of the project.

By offering this financial safeguard, completion bonds reduce the risk of unfinished or delayed construction while providing security for project owners and investors.

The cost of a completion bond is generally calculated as a percentage of the total project cost, reflecting the size, complexity, and financial risk of the construction project. Premiums typically range from 1% to 3% for contractors or developers with strong financial profiles.

Key factors that influence the cost include:

• Project cost: Larger projects with higher budgets require higher bond amounts, which increases the premium.
• Project complexity and risk: Projects with multiple contractors, tight schedules, or technically challenging work can increase the surety’s risk assessment, slightly raising the cost.
• Credit and financial strength: Contractors or developers with strong credit and proven financial stability are considered lower risk and usually qualify for more favorable rates.
• Experience and claims history: Contractors with a track record of completing projects on time and without claims typically receive lower premiums.
• Surety company: Premiums can vary depending on the surety’s evaluation and risk appetite. Working with reputable surety companies ensures reliable coverage and competitive pricing.
   

For example, a $2,000,000 construction project backed by a contractor with excellent credit might have a completion bond premium between $20,000 and $60,000 annually, depending on risk factors and project complexity.

Applying for a completion bond ensures a construction project will be completed on time, within budget, and to specification. Here’s what applicants should know:

1. Gather Required Information

Prepare detailed documents for underwriting, including personal and business credit information, organizational details, licenses or permits, project plans, budgets, timelines, work history of completed projects, and recent financial statements.

2. Submit Your Application

Apply through a licensed surety bond agency, such as Lance Surety Bonds using our online application, providing full project details so the surety can assess scope, timeline, risks, and key personnel.

3. Surety Underwriting and Review

The surety evaluates the contractor’s credit, financial strength, project experience, and past claims. They may also review subcontractors and perform site visits. This process determines eligibility and sets the bond premium.

4. Sign the General Indemnity Agreement (GIA)

If approved, the contractor signs a GIA, agreeing to reimburse the surety for any losses if a claim arises due to non-completion or other covered issues.

5. Pay the Premium

Once underwriting and the GIA are complete, the contractor pays the premium, typically a percentage of the total project cost reflecting project complexity and risk.

6. Receive the Bond and Begin Construction

After payment, the surety issues the bond. The obligee (project owner, lender, or investor) receives financial protection, and the surety monitors the project to ensure completion, stepping in if necessary.

Filing a completion bond claim occurs when a construction project is at risk of non-completion due to contractor default, financial issues, or other covered problems. The process ensures the obligee (project owner, lender, or investor) can secure project completion or reimbursement.

1. Notify the Surety

If issues arise that may prevent the contractor from completing the project, the obligee must promptly notify the surety. Clear documentation of delays, financial shortfalls, or breaches of contract is essential.

2. Provide Documentation and Evidence

The surety will request detailed evidence, including project schedules, budgets, correspondence with the contractor, and any notices of default. Accurate records help the surety assess the validity and scope of the claim.

3. Surety Investigation

The surety investigates the claim to determine whether it is valid under the terms of the bond. This may involve reviewing financial records, inspecting the site, and communicating with the contractor and subcontractors.

4. Claim Resolution

If the claim is approved, the surety may take one or more actions:

• Provide additional funds to the contractor to complete the project.
• Hire a replacement contractor or manage the project directly.
• In extreme cases, take over the project entirely to ensure completion.
   

5. Reimbursement Obligation

The principal (contractor) is required to reimburse the surety for any costs incurred to satisfy the claim. This obligation is outlined in the General Indemnity Agreement (GIA) signed during bond issuance.

6. Project Completion or Compensation

The surety ensures the project is completed or compensates the obligee as necessary, protecting their financial investment and reducing the risk of delays or unfinished work.

Completion bond claims typically arise in situations where the contractor is unable to finish the project as agreed. Some common scenarios include:

• Contractor Default - The contractor stops work due to financial problems, insolvency, or mismanagement.
• Budget Overruns - The project exceeds its allocated budget, and the contractor cannot cover the additional costs.
• Delays in Project Completion - Significant schedule delays threaten the timely delivery of the project, impacting investors or lenders.
• Poor Performance or Breach of Contract - The work being completed does not meet the specifications outlined in the contract, putting the project at risk.
• Subcontractor or Supplier Failures - Critical subcontractors or suppliers fail to deliver, halting progress and jeopardizing project completion.
• Legal or Regulatory Issues - Unforeseen legal disputes or permitting issues prevent the project from proceeding on schedule.

These scenarios trigger the surety’s involvement, ensuring the obligee’s investment is protected and the project can be completed on time, within budget, and to specification.

How long does a completion bond last?

A completion bond remains in effect until the construction project is fully completed and accepted by the obligee, typically covering the entire duration of the project and any agreed-upon maintenance period.

Can a completion bond be canceled or terminated early?

Yes, but cancellation usually requires the surety’s approval and the obligee’s consent. Any potential risk to project completion must be mitigated before the bond can be terminated.

Is a completion bond transferable if the project changes ownership?

Generally, no. If ownership or contractor responsibilities change, a new bond or surety approval is typically required to maintain coverage.

What happens if the project scope or budget changes after the bond is issued?

Significant changes may require an updated bond or an increase in the bond amount to ensure full coverage for the revised scope or budget.

Does a completion bond guarantee quality of work?

No. The bond guarantees project completion and financial protection, but quality and specifications are typically enforced through contractual agreements and inspections.

Can completion bonds cover multiple projects under one bond?

Typically, completion bonds are project-specific. Some sureties may allow a blanket bond covering multiple projects, but this requires approval and may involve additional underwriting.

Are completion bonds required by law or only by lenders?

Completion bonds are generally not legally required but are often mandated by lenders, investors, or project owners to mitigate financial risk.

What is the difference between a completion bond and a performance bond?

A completion bond guarantees the entire project will be finished on time, within budget, and protects the obligee financially. A performance bond only ensures that specific contractual work is completed according to agreed standards.