What Is a Completion Bond?
In massive commercial real estate developments, the financial risks are catastrophic. If an investor takes out a $50 million construction loan to build a high-rise condo, and the general contractor goes bankrupt halfway through, the investor is left with a half-built concrete skeleton, zero revenue, and a $50 million debt they cannot pay.
To prevent this, commercial lenders and large developers require the general contractor to purchase a completion bond (often packaged as a performance bond) before they are allowed to start digging.
A completion bond is essentially an insurance policy issued by a massive surety company. By issuing the bond, the surety company guarantees the developer and the bank that the building will be completed.
How the Bond Is Enforced
If the general contractor walks off the job, breaches the contract, or goes bankrupt, the developer files a claim against the completion bond. The surety company then has three options to fulfill its legal obligation:
- Finance the Original Contractor — Provide emergency cash to the failing contractor so they can finish the job.
- Hire a Replacement — The surety company uses its own massive cash reserves to hire a brand new general contractor to take over the site and finish the building according to the original blueprints.
- Pay the Penalty — The surety company writes a massive check (up to the full penal sum of the bond) to the developer, reimbursing them for the financial damages caused by the abandoned project.
Public Projects vs. Private Development
In Florida, completion and payment bonds are absolutely mandatory on almost all large government construction projects under the "Little Miller Act" (Section 255.05, Florida Statutes). The government cannot risk taxpayer money on a bridge or school that might never be finished. While not legally required on private commercial projects, virtually every sophisticated lender will demand one before releasing a construction draw.
Related Terms
- Construction Draw — The loan funds protected by the existence of the bond
- Contract — The original agreement the bond guarantees will be fulfilled
- Breach of Contract — The event that triggers the developer's claim against the bond
Barnes Walker Construction Law
Barnes Walker's construction litigators represent Florida developers in aggressively pursuing claims against multi-million-dollar surety bonds, forcing hesitant bonding companies to step in and fund the completion of abandoned commercial projects. Request a legal inquiry for assistance.
Reviewed by the attorneys at Barnes Walker, Goethe, Shea & Robinson, PLLC