Construction Bonds: What They Are and Why They Matter

By Kerri Nicholson, Esq.

Construction bonds are vital tools in the construction industry. A construction bond is an instrument arising out of suretyship law. A project owner may require a contractor to obtain one or more types of construction bond to ensure or guarantee that construction projects are completed in accordance with contract terms, often focusing on adhering to the budget, performing quality workmanship consistent with accepted standards, and abiding by the designated timeline.

Suretyship is “[t]he legal relation that arises when one party assumes liability for a debt, default, or other failing of the second party.” SURETY BONDS, MCLD MD-CLE 319. In other words, construction bonds serve as a primary risk-mitigation method. While not entirely equivalent, construction bonds can be thought of as a form of insurance or financial guaranty. See id. Similar to payment for an insurance policy, contractors pay a premium in exchange for the surety to issue a bond.

Different types of bonds protect different key players in the construction industry. Understanding the implications of each bond type and protections they afford can be critical. There are several basic forms of construction bonds, including, but not limited to: performance bonds, payment bonds, bid bonds, compliance bonds, and license and permit bonds.

One of the primary types is the performance bond, where a surety essentially promises or guarantees that a contractor will perform its duties as specified in the contract. If the contractor does not perform as contractually obligated, the bond steps in to cover outstanding costs for completion of the contractor’s work in accordance with the contract terms. Another primary bond is the payment bond, which guarantees that the contractor will pay its laborers, subcontractors, suppliers, and vendors who facilitate and work on the project. The payment bond underscores the recurring theme of risk-mitigation for project owners by providing an alternate source for payment of potential claims by subcontractors and materials suppliers in the event that contractors fail to make payment. Bid bonds typically are limited in scope and protect the government or other project owners, ensuring that bidders both submit adequate bids and proposals and have the ability to complete the project.

Bonding requirements can differ based on the type of construction. For example, Title 40 of the United States Code, Section 3131, also known as the “Miller Act,” requires performance and payment bonds for all federal construction projects involving a contract value above $100,000. Many states also require bonds in the public construction sector via statute, often referred to as “Little Miller Acts.”

Several states even apply bond requirements in the realm of private construction. For example, New Jersey passed into law a series of changes to the regulatory scheme governing home improvement and home elevation contractors effective March 31, 2025. Home Improvement and Home Elevation Contractor Licensing Act, 2023 N.J. Laws ch. 237 (2023). One portion of the law requires that contractors maintain a compliance bond issued by a surety authorized in the state, an irrevocable letter of credit issued by a bank, or other acceptable securities guaranteeing adherence to New Jersey building codes and ensuring that project obligations are met. The law contains minimum principal amounts for the compliance bond that varies according to contract value. The law also requires contractors to be licensed, as opposed to just being registered to do business with the state, and to carry both commercial general liability with at least $500,000 in coverage and workers’ compensation insurance.

While bonds may seem to favor just about everyone but the contractor who has to pay for them, a recent win for a contractor in West Virginia’s Intermediate Court of Appeals seems to indicate otherwise. In West Virginia Department of Transportation, Division of Highways v. Olympus Painting Contractors, Inc., et al.,  251 W. Va. 318, 912 S.E.2d 311 (Ct. App. 2025), Olympus Painting Contractors attempted to use a provision under West Virginia Code § 5-22-2  to withdraw a bid it prepared for the Department of Transportation containing a significant mistake. West Virginia Code § 5-22-2 creates a process for government agencies to reject “erroneous” bid proposals by contractors who offer to complete a government project. Section 2(b) spells out four conditions that the agency must find before rejecting an erroneous bid proposal. Another part of the statute, Section 2(c), provides that a “contractor who withdraws a bid under the provisions of this section” is subject to a penalty.  Olympus’ mistake was due to a handwriting issue that confused numbers and made Olympus the lowest bidder, coming in about $1.6 million less than the next lowest bidder. Olympus contacted the Division of Highways (DOH) after DOH opened the bids but before it chose the winning bid. Olympus sought to have its bid rejected by DOH due to the mistake in its bid.

In response, DOH decided that Olympus was not entitled to rejection of its bid. DOH advised Olympus that it was awarded the project and that it must sign a contract within twenty days. Olympus did not sign the contract and instead continued to seek rejection of its bid by DOH.  DOH’s lawyer warned Olympus that if it did not sign the contract by a certain date, Olympus would forfeit its five percent bid bond. When DOH demanded the amount of the bond be paid by the bond issuer, Great Midwest Insurance Company, the insurance company refused to pay.

Following suit, a lower court ruled in favor of Olympus, finding that its mistake was an inadvertent, clerical error that was followed by prompt notification to DOH. Testimony from both sides showed that the error was drastic, and the circuit court accordingly found that “it was unconscionable for DOH to require Olympus to perform for a price $708,000 below its intended bid.” According to the circuit court, Olympus met the four conditions under West Virginia Code § 5-22-2(b) for withdrawal. The circuit court also noted that DOH could and should have rejected the bid or allowed the bids withdrawal. Citing both these factors, the court concluded that DOH was not entitled to Olympus’ bid security. On appeal, the West Virginia Intermediate Court of Appeals affirmed in part, upholding the circuit court’s grant of summary judgment in favor of Olympus on three out of the four original bases. As of this writing, the case has been remanded to the lower circuit for further review focusing on whether DOH’s decision that Olympus’ error was not sufficient to entitle rejection was arbitrary, capricious, or an abuse of discretion.

As demonstrated, construction bonds play a significant role in the construction industry and can have significant financial effects on the involved parties.  Staying informed  of legislation and developing case law in your jurisdiction is vital for project planning, budgeting, and risk avoidance, mitigation and transfer.  If you are an owner, general contractor, subcontractor, or insurance professional seeking guidance on bonding, the attorneys at Carr Maloney P.C. are here to help.