A construction bond is a type of surety bond. A surety bond is a three-party contract that includes the surety (company that guarantees performance); the principal (contractor); and the obligee (owner). The Principal promises to perform its contract obligations to the obligee (owner), and the surety guarantees the principal’s performance of its obligations by paying the obligee if the principal fails to meet its obligations. Surety bonds used in construction are called contract surety bonds.

There are 3 types of contract surety bonds:

1. Bid Bond. A bid bond provides financial protection to an obligee (owner) if a bidder is awarded a contract based on bid documents, but fails to sign the contract and provide the required performance and payment bonds. The bid bond helps screen out unqualified bidders and is an important part of the competitive bidding process on some construction projects.

2. Performance Bond. A performance bond protects the obligee (owner) from financial losses if the contractor fails to perform the construction contract according to its terms. If the obligee (owner) declares the principal (contractor) in default and terminates the construction contract, the obligee can demand the surety meet the surety’s obligations under the terms of the bond.

3. Payment Bond. A payment bond guarantees the contractor’s payment of subcontractors and material suppliers.

In New Mexico (NM), construction bonds are a critical component of the construction industry, serving as a risk management tool to ensure project completion and the fulfillment of contractual obligations. The three main types of contract surety bonds used in construction are bid bonds, performance bonds, and payment bonds. A bid bond ensures that a contractor will enter into a contract if awarded the bid and provide the necessary performance and payment bonds. A performance bond safeguards the project owner from losses if the contractor fails to perform according to the contract terms, allowing the owner to call upon the surety to fulfill the contract obligations. Lastly, a payment bond guarantees that the contractor will pay subcontractors and suppliers, protecting the owner from potential liens against the property. These bonds are typically required by state statutes for public construction projects, and may also be stipulated in private contracts. New Mexico's specific regulations regarding these bonds can be found in the state's statutes, such as the New Mexico Public Works Minimum Standards Act, which mandates performance and payment bonds for public works contracts exceeding a certain monetary threshold.