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 Ohio, construction bonds are a critical component of the construction industry, serving as a risk management tool to ensure project completion and financial security for the involved parties. These bonds are a form of surety bond, which is a three-party agreement involving the surety (the company providing the bond), the principal (the contractor), and the obligee (the project owner). The principal is obligated to fulfill the contract terms, and the surety guarantees this performance to the obligee, compensating them if the principal fails to meet their obligations. The three main types of contract surety bonds used in Ohio are: 1) Bid Bonds, which ensure that a contractor will enter into a contract if awarded the bid, 2) Performance Bonds, which secure the contractor's performance in accordance with the contract, and 3) Payment Bonds, which assure that the contractor will pay subcontractors and suppliers. These bonds are often required for public construction projects in Ohio, and may also be used in private projects to mitigate risk. Ohio's specific statutes and regulations govern the requirements and enforcement of these bonds, aligning with federal laws such as the Miller Act, which mandates performance and payment bonds for certain federal construction projects.