The Role of Surety Bonds in Construction Law: Understanding Your Obligations
July 14, 2025
Construction projects often involve significant financial investment, multiple parties, and detailed contractual requirements. For contractors, project owners, and suppliers in Texas, understanding how these bonds function under construction law is essential to meeting obligations and protecting business interests.
Surety bonds act as a financial tool that provides reassurance to project stakeholders. They help allocate responsibility, support contractual performance, and reduce the chances of unresolved disputes when problems arise.
At the Law Office of Keith D. Peterson, CPA, J.D. in Houston, Texas I have the experience and knowledge necessary to properly serve my clients, and I’m ready to assist you with your construction law case. I’ll explain what you need to know about surety bonds in more detail.
Defining Surety Bonds in the Construction Context
A surety bond is a three-party agreement among a principal, an obligee, and a surety. In construction law, the principal is usually the contractor, the obligee is the project owner, and the surety is a bonding company that agrees to step in if the contractor fails to meet the terms of the contract.
There are several types of surety bonds commonly used in Texas construction projects:
Performance bonds: These protect the owner if the contractor doesn’t complete the project according to the contract terms.
Payment bonds: These protect subcontractors, laborers, and suppliers by specifying they’ll receive payment even if the contractor defaults.
Bid bonds: These assure that a contractor who wins a bid will enter into the contract and provide required performance and payment bonds.
Each bond serves a specific function, and selecting the correct type is a critical part of contract preparation under Texas construction law.
Why Surety Bonds Matter in Texas Projects
In Texas, public construction projects generally require surety bonds as a condition of the contract. The Texas Government Code, Chapter 2253, outlines specific bonding requirements for public works, including the use of performance and payment bonds for contracts exceeding certain amounts.
For private projects, bonds may not be required by statute but are still widely used as part of risk management. Owners may request bonds to reduce financial exposure and to keep subcontractors confident about payment.
How Surety Bonds Protect Stakeholders
Surety bonds create accountability by adding a financially responsible third party to the project. When a contractor is unable to meet performance or payment duties, the surety may:
Hire another contractor to finish the job
Pay suppliers or subcontractors directly
Provide financial compensation up to the bond’s limit
This structure helps reduce the risk that project owners will face unpaid claims or incomplete work. It also gives subcontractors a way to recover unpaid amounts without relying solely on mechanics’ liens or prolonged litigation.
Key Obligations for Contractors
Contractors who obtain surety bonds take on several obligations that go beyond ordinary contract duties. These include:
Complying with the original contract terms
Communicating with the surety about performance or financial issues
Reimbursing the surety if a claim is paid on their behalf
Contractors who misunderstand the reach of these responsibilities may face unexpected liabilities. In many cases, bonding agreements include indemnity clauses that require the principal to repay the surety for losses, legal fees, and settlement costs.
Obligations for Sureties and Project Owners
While sureties step in when a contractor defaults, they also have duties to investigate claims and avoid unjustified denials. A surety must act in good faith and follow proper procedures before denying or settling a bond claim.
Owners, on the other hand, must take steps to trigger the bond correctly. This usually involves notifying the surety in writing, proving default, and cooperating with the investigation.
Common Disputes Arising From Bond Claims
Despite their purpose, surety bonds can lead to disputes when parties disagree about whether a contractor truly defaulted or whether a claim is valid. Common disputes include:
Whether the principal was actually in default under the contract
Whether notice was provided to the surety in the proper manner
Whether the obligee contributed to the failure (e.g., delayed payments or project interference)
Whether subcontractors followed correct procedures to make a payment bond claim
Construction law in Texas recognizes both contract principles and statutory rules when analyzing surety bond disputes. Courts may enforce strict deadlines, and failure to comply can defeat otherwise valid claims.
How Subcontractors Use Payment Bonds
In public projects, Texas law requires payment bonds when contracts exceed $25,000. This gives subcontractors and suppliers a direct way to seek payment without filing a lien.
To file a valid claim on a payment bond, subcontractors typically must:
Send written notice to the contractor and surety
Identify the unpaid amount and describe the labor or materials provided
File within the deadlines outlined in Chapter 2253 of the Texas Government Code
Private projects may also include payment bonds, though they’re not required by law. In such cases, the terms of the bond agreement control how claims must be made.
Filing against a payment bond is a technical process. Missing a notice deadline or failing to use proper language can cause a claim to fail. Legal support helps subcontractors understand and protect their rights within construction law requirements.
Bond Requirements in Federal Construction Projects
When Texas contractors work on federal construction projects, the bond requirements shift slightly. According to the Miller Act, federal law requires performance and payment bonds for contracts exceeding $150,000.
Miller Act claims follow a different process and have their own notice and filing rules. Subcontractors who haven’t been paid must meet strict deadlines and include detailed information in their notices.
Preventing Bond Claims Through Contract Management
While surety bonds provide a safety net, all parties should avoid bond claims entirely. Proper contract management can reduce the chance of disputes and help maintain business relationships.
Contractors can take several steps to prevent problems:
Track deadlines, budgets, and performance benchmarks closely
Maintain regular communication with owners and subcontractors
Address issues early, before they become larger problems
Document changes and disputes in writing
Construction law supports proactive contract practices. When parties keep records and act consistently with the contract, it’s easier to resolve disagreements without involving a surety or escalating to litigation.
How an Attorney Will Help With Bond Issues
Contractors, owners, and subcontractors often turn to legal counsel when bond issues arise. Your attorney provides guidance on whether a bond covers a particular claim and what steps must be taken to preserve rights.
Legal support is particularly helpful in situations involving:
Disputed performance defaults
Denied payment bond claims
Multi-tiered subcontractor arrangements
Terminations or contract modifications that affect bond coverage
Construction law includes both statutory and contract-based rules. A construction law attorney helps analyze which laws apply, how bond language should be interpreted, and whether claims have legal merit.
When Bond Claims Lead to Litigation
Some bond disputes can’t be resolved through informal discussions or negotiations. When that happens, parties may turn to litigation. In Texas, construction law litigation often involves a combination of contract law, statutory obligations, and surety responsibilities.
Lawsuits over bond claims may be brought in state or federal court, depending on the nature of the project and the type of bond involved. Courts examine several factors, including:
The terms of the bond
The performance history under the contract
Whether deadlines and notice requirements were met
Any defenses raised by the surety or contractor
Litigation over bond issues can be time-consuming and expensive. But in some cases, it’s the only available method to recover payment or enforce performance obligations. Attorneys with experience in construction law help clients evaluate when litigation makes sense and what outcomes to expect.
Keeping Bonding Capacity Strong
Contractors who rely on surety bonds must maintain strong relationships with bonding companies. Bonding capacity—how much work a contractor can take on with the backing of a surety—depends on financial strength, past performance, and trust.
Mismanaging a bond claim or failing to repay the surety can weaken future bonding ability. That, in turn, can limit access to future projects, particularly public jobs that require bonding by law.
Reach Out Today
Surety bonds play a key role in managing risks and enforcing obligations in construction projects. Whether used in public or private contracts, these bonds help support completion, protect payments, and maintain financial accountability. At the Law Office of Keith D. Peterson, CPA, J.D., I serve clients in Houston, Texas, and the surrounding areas. Call me today to learn how I can help you with your construction law case.