What Is a Construction Completion Bond?

by Nicholas B. Sisson; Updated September 26, 2017

A construction completion bond, or completion bond, is one of many surety bonds used as part of a building contract. A completion bond ensures that the obligor sees the project through to its completion as expressed in a contract with an obligee. Unlike performance bonds or payment bonds, completion bonds protect the creditor financing a project rather than the contractual client or principal's suppliers.

Surety Bonds

Surety bonds are documents which guarantee compensation from a third party to an obligee on behalf of an obligor under contractual circumstances. This guarantor third party issues a surety bond to an obligor for a specific amount. The obligor then gives the surety bond to the obligee as a guarantee of compensation should the obligor fail to fulfill the terms of the contract. If this occurs, the surety compensates the obligee and recuperates the amount from the obligor.

Completion Bonds

Completion bonds are surety bonds which a contractor submits to a bank or other creditor that has disbursed a loan to finance a project. A completion bond ensures that a creditor still receives principal and interest on a loan even if the project itself fails to reach completion. Additionally, a completion bond implicitly ensures that there are no outstanding liens from participating contributors (employees, suppliers and subcontractors) once the project is complete.

Completion Bonds vs. Payment Bonds

Completion bonds should not be confused with payment bonds. Payment bonds are surety bonds given by an obligor to its suppliers, employees and subcontractors as obligees to ensure full and timely payment. If they fail to receive such payment from the obligor, these parties may act on their respective payment bond for necessary compensation. If the surety compensates any of these parties, the obligor is responsible for the cost. If all parties are paid in full and on time by the project's conclusion, these parties return the payment bonds to the obligor.

Completion Bonds vs. Performance Bonds

Performance bonds also differ from completion bonds. Whereas completion bonds create a guarantee between the obligor and its lender as obligee, performance bonds create a guarantee between the obligor and the contractual obligee. A performance bond guarantees that the obligee receives compensation for any losses in connection with breach of contract on the part of the obligor.

About the Author

Nicholas B. Sisson holds a B.A. in economics from Ithaca College and a certificate in technical communication from J.B.S. Technical Communications, Ltd. Working in investment operations, Sisson participated in an initiative to revise and rewrite his group's procedure manual. More recently, Sisson created definitions of financial terms for the glossary of a major financial website. He has been writing since 2008.