A completion bond looks simple at first glance. Pay a premium, get a surety to guarantee that the project will be finished if things go off the rails. In practice, the document stack behind that promise is dense, and the indemnity agreement that sits under the bond has teeth. If you build anything that depends on third-party financing, or you touch film, real estate, infrastructure, or large-scale software deployments with milestone-based funding, you will encounter completion bonds. The most common trap is treating the indemnity as boilerplate. It rarely is.
I have sat with developers paging through a 20-page indemnity on the hood of a truck ten minutes before a closing, and I have seen the same developers spend months in claims fights because they signed a form without thinking through collateral, personal liability, or step-in rights. What follows is a practical map of the ground you are walking on, with concrete clauses to watch, negotiation levers that actually move, and the operational habits that keep you out of a claim in the first place.
What a completion bond really guarantees
A completion bond is a surety instrument. The surety, usually a specialized insurer or a division of a large carrier, guarantees to the project’s counterparty that the contracted work will be completed for no more than the remaining balance of the contract. If the bonded developer defaults, the surety either finances you to finish, tenders a replacement, or pays to complete up to its limit.
That headline hides an important asymmetry. The surety is not taking performance risk the way an insurer takes accident risk. The surety expects zero loss. If it must pay, it will look to you, and to anyone else who signed the indemnity, for full recovery, including its legal fees. That expectation shapes everything in the indemnity agreement.
In real estate and construction, the bond might be required by a lender or public owner. In film, the completion bond sits between producers and financiers to guarantee delivery of a picture as budgeted and scheduled. In software or systems integration, a performance bond can fill a similar role when milestones release funds from conservative institutional buyers. The mechanics differ, but the indemnity DNA is the same.
The indemnity agreement is the engine, not a cover sheet
When you ask a surety to issue a completion bond, it assesses your financial strength, track record, and the project. If it says yes, it issues the bond only after you sign a general agreement of indemnity. The GAI is a separate contract, enforceable in its own right, and drafted to be one-sided. It gives the surety broad rights to recover any outlay and to protect itself before a loss ever happens.
Expect, at a minimum, provisions that:
- Create joint and several liability among all indemnitors. Grant the surety a security interest in your assets and the bonded contract proceeds. Permit the surety to demand collateral on short notice if it anticipates a loss. Assign subcontract balances, claims, and causes of action to the surety on default. Allow the surety to settle claims and make payments in its sole discretion, with its vouchers serving as prima facie evidence of the amount you owe.
Developers new to bonding often assume these items are theoretical. They are not. When a project goes sideways, the surety’s lawyers move quickly, and courts routinely enforce these clauses as written.
Who is on the hook: entity, affiliates, and people
On a clean deal, the developer’s project entity signs. On riskier profiles, the surety widens the net. It asks for parent guarantees, affiliate indemnities, and personal guarantees from principals. I have seen founders surprised to learn that their spouse’s signature on a joint personal indemnity exposed jointly held assets to a claim.
The surety looks through the org chart to the real sources of repayment. If the project LLC has no assets outside the job, the surety wants upstream recourse. Whether you accept that depends on your bargaining power and the project’s economics. If a personal indemnity is unavoidable, cap it. Tie it to a dollar amount or to a percentage of the penal sum, and carve out homestead protections and retirement accounts where state law allows. Push for a burn-down, where personal exposure reduces as milestones are met, equity is contributed, or contingency is preserved.
Collateral and the right to demand it mid-project
A quiet clause with outsized impact lets the surety call for collateral before it spends a dollar. The text usually ties the demand to the surety’s belief that a loss is probable. “Probable” is not defined. If a major subcontractor walks, or your lender freezes a draw, the surety may send a letter asking for cash collateral equal to its projected exposure.
From a developer’s perspective, a midstream collateral call can crater liquidity. This is not hypothetical. On a $38 million mixed-use build, a surety demanded $4.5 million in collateral after the electrical subcontractor filed for bankruptcy. The developer had to choose between posting collateral within ten days or accepting the surety’s takeover plan. They posted, but only after negotiating a staged deposit keyed to a remediation plan and a third-party cost-to-complete estimate.
You have two tools to manage this risk: define process and define size. Add a notice-and-cure period. Require the surety to share the basis for its belief, including cost-to-complete, delay exposure, and contingency analysis, and to consider your proposed mitigation. Set reasonable caps or formulas, such as limiting collateral to uncovered exposure after available contingency and retainage.
Indemnity is broader than completion costs
Read the definitions of “Loss” or “Exposure” in the indemnity. They often sweep in defense costs, consultant fees, internal expenses, interest, and penalties. If the surety hires a forensic scheduler and a cost engineer, or it litigates with an owner over liquidated damages, its spend lands on your tab, even if the surety wins.
One midsize infrastructure contractor learned this the hard way. The surety prevailed in arbitration against a public owner who had wrongfully terminated the job, but its legal bill exceeded seven figures. The contractor assumed a victory meant no payback. The indemnity’s language said otherwise, and the surety collected. If you cannot narrow the definition, push for reasonableness standards and the right to participate in material litigation decisions.
The surety’s “sole discretion” and evidentiary shortcuts
Several provisions tilt the field in a dispute. A settlement-without-consent clause lets the surety resolve obligee claims or pay subcontractors it deems necessary. A vouchers clause says the surety’s payment records are prima facie evidence of your debt. Combined with a confession-of-judgment or New York-style consent to jurisdiction and venue, these terms can let the surety move swiftly to judgment.
You will not strike these rights entirely, but you can add guardrails. Replace sole discretion with reasonable discretion. Require consultation on any settlement above a negotiated threshold. Add a duty to mitigate and to consider affirmative claims you hold against the obligee or subs. On vouchers, ask for an audit right and an evidentiary presumption that is rebuttable with clear error, not an incontestable amount.
Subrogation, assignment, and who controls claims
When the surety pays, it steps into your shoes against the owner, subs, suppliers, and insurers. Many indemnities pre-assign these rights on default, which can interfere with your own recovery strategy. If you are chasing an owner for unpaid change orders, you do not want your surety cutting a different deal that trades your claims for its release.
Align interests early. Build a protocol that coordinates litigation or arbitration strategy, including counsel selection, cost sharing, and settlement authority. Clarify that the surety will not compromise your affirmative claims without consent, except where necessary to avoid greater loss.
Step-in rights and takeover mechanics
Completion bonds give the obligee options if you default. It can declare a default and request the surety to perform. The surety then chooses a path: finance you, tender a replacement, or take over. Developers often want the finance-you path, because it preserves control and brand, but the surety may prefer a takeover if it doubts management or if the cost to cure looks unpredictable.
The indemnity shapes this decision. If you show the surety you can execute a realistic completion plan, backed by cash and partner commitments, you shift the calculus. In one data center build, a developer avoided takeover by presenting a revised schedule, a 7 percent increase in contingency funded by an equity top-up, and executed standby subcontracts to replace two at-risk trades. The surety financed completion under a tight monitoring regime. Without that plan, takeover would have been automatic.
Common triggers for claims and how to stay ahead of them
Most claims are not driven by one dramatic failure. They creep in through small misalignments: a draw underfunded by minor retainage mistakes, a weather buffer shaved too thin, a key supplier that overstretched on another job. By the time the owner loses patience, the cost-to-complete plus delay exposure outstrips the remaining contract balance, and the surety’s radar lights up.
The habits that protect you start before bid day:
- Validate cost-to-complete with independent eyes. A third-party estimator who has no stake in your margin will find blind spots in self-performed scopes, escalation, and logistics. Structure contingency honestly. A 5 to 7 percent hard cost contingency on simple projects may suffice, but complex, MEP-heavy or renovation work often needs 10 to 12 percent, plus a schedule contingency that ties to long-lead items. Manage subcontractor credit proactively. Run credit checks, monitor supplier liens, and diversify critical trades so a single failure does not paralyze the job. Treat change orders as cash flow events. Unapproved change directives drain contingency and invite disputes. Price and document them fast, and align the owner’s funding source for each change. Keep the surety informed before it hears from the obligee. Quarterly summaries with schedule, budget variances, claims status, and a 60-day look-ahead earn credibility. Surprises erode it.
Each of these points reduces the chance that the surety will see “probable loss” and reach for collateral or control.
Negotiation levers that actually move
Sureties resist wholesale edits to their indemnity forms, but they will modify for qualified principals on well-structured projects. The leverage depends on the penal sum, your financials, loss history, and whether the market is competing for your paper. The most productive requests focus on process and proportion rather than on negating core rights.
A realistic wish list includes:
- Notice and cure periods before default declarations or collateral calls take effect, typically 5 to 15 business days. Reasonableness standards, replacing “sole discretion” with “reasonable discretion,” and adding a duty to mitigate. Caps or carve-outs on personal indemnity, including burn-downs at milestones and exclusions for certain asset classes where permitted by law. Audit and participation rights in claim decisions, plus thresholds for settlements that require your consent. Clarified subrogation and assignment language that protects your affirmative claims and recovery sequence, with a waterfall for proceeds.
Bring documentation that supports each request: project budget with contingency logic, sponsor equity commitments, lender term sheet language, and a track record of bonded jobs closed without loss. Make the underwriter’s file easy to justify to a credit committee.
Financing interfaces: lenders, owners, and cross-defaults
The indemnity does not live in a vacuum. It sits alongside your construction loan agreement, owner contract, intercreditor agreements, and sometimes mezzanine or tax equity documents. Cross-defaults are common, and the order-of-operations in a crisis matters.
If a lender can sweep contract funds or demand a loan default before the surety can step in, the completion plan may fail for lack of cash flow. Align the documents so that a surety-financed completion option remains viable. That might mean a forbearance trigger tied to a surety-approved cure plan, a segregated completion account subject to surety and lender control, or a standstill on enforcement while a jointly agreed engineer validates cost-to-complete.
Owners also care. Public owners follow statutory forms, but private owners can agree to notice periods and cure mechanics that dovetail with your indemnity and bond. Reducing the chance of a sudden termination helps everyone.
Insurance is not a substitute for indemnity
Developers sometimes assume that project insurance will cover the surety’s loss. Builder’s risk, professional liability, subcontractor default insurance, and wrap-up programs have roles, but they do not repay the surety automatically. The indemnity usually assigns insurance proceeds to the surety on default and lets it control claims under those policies where permissible. Your job is to map coverage to plausible failure modes and to close exclusions before you break ground.
On a hospital renovation, for example, hot works exclusions and impaired property exclusions in the builder’s risk and general liability programs left a gap that later fed a bond claim. The fix, had it been addressed up front, would have been endorsements tailored to the specific MEP tie-ins and a detailed impairment protocol signed by the owner, GC, and facilities team.
Jurisdiction, venue, and how disputes actually play out
Indemnities often select a home-field forum for the surety, such as New York courts, with waivers of jury trial. Some include confession-of-judgment provisions where state law allows, which can shortcut the path to a judgment. If you do not want to litigate 1,000 miles from the job, negotiate venue and governing law. At a minimum, remove confession-of-judgment language and ensure service and notice provisions give you a fair chance to respond.
When disputes arise, they move fast. The surety sends a demand, cites the indemnity, and sets a short fuse. If you lack a factual record, you are negotiating from a blank page. Maintain contemporaneous documentation: daily reports, CPM updates, change logs, meeting minutes with owners and subs, and photographs tied to schedule activities. These records matter both for convincing the surety to finance completion and for limiting the scope of what it pays if a claim proceeds.
Special cases: film and software completions
In film, the completion bond is more hands-on. The bond company monitors production daily, reviews dailies, controls bank accounts by covenant, and has approval rights over key creatives. The indemnity reflects that control. It includes covenants about delivery elements, cast availability, and force majeure risk allocation. Producers sometimes bristle at the oversight until they need the bond company to bridge a funding delay. If you produce, read the cash flow schedule, understand the bond company’s right to replace personnel, and budget real contingency for weather, stunts, and VFX where slippage multiplies.
In enterprise software, a “completion bond” is less common, but some buyers demand performance bonds or escrow agreements for source code and delivery milestones. The indemnity still bites if you default. The difference is in how default is measured. Scope creep, unclear acceptance criteria, and dependency on client-side resources can create false defaults. The fix is definition. Tie milestones to objective deliverables, include acceptance periods, and build a change control process that both sides actually use. If a financial buyer insists on a bond, write the indemnity so collateral calls cannot be triggered by client delay.
Practical redlines and their real-world effect
Lawyers can refine language endlessly, but a handful of edits move the risk needle without blowing up the deal:
- Add a proportionality clause. The surety’s remedies and collateral demands should be proportionate to the credible, quantified exposure after available project buffers. Define “default” with specificity. Distinguish between monetary default and technical default, with cure periods calibrated to the harm. Insert a cooperation covenant both ways. You will provide information promptly, and the surety will consider your plan, share key analyses on request, and not unreasonably withhold consent where the plan controls loss. Carve out excluded losses. No indemnity for losses arising from the surety’s gross negligence, willful misconduct, or bad-faith settlements that ignore viable defenses you identified in writing. Set a claims governance framework. Name a joint steering group, meeting cadence, document exchange protocols, and escalation steps before litigation.
I have seen these edits survive underwriting when the developer shows discipline in planning and when the obligee’s contract is clean. They can fail when the file shows thin equity, a crowded lien stack, or a sponsor who fought every reporting covenant. Presentation matters.
What numbers matter to the surety
Underwriters live in ratios and track records. They look at working capital, net worth, debt-to-equity, current ratio, and available bank lines. They examine your WIP schedule for underbillings that hint at margin fade, and they scrutinize how you handled prior punch-list disputes. On a single project, they zero in on percent complete versus percent billed, cash burn rate against contingency, and the critical path’s float.
If your current ratio sits around 1.2, underbillings exceed overbillings by seven figures, and you are layering two large starts on existing commitments, expect a tighter indemnity and a higher likelihood of collateral calls. If you post strong liquidity, predictable gross margins over the past eight quarters, and a clean loss history, you can push for friendlier terms.
Exit paths and how exposure ends
A developer’s favorite question is when indemnity exposure ends. The axcess Surety short answer is not at substantial completion. Indemnity continues until the surety is fully discharged, which means the obligee has accepted the work, warranty periods that the bond references have expired if applicable, any claims made during the bond period are resolved, and the surety issues a formal release. On public work, statutes sometimes define claim periods. On private work, the contract controls.
You can accelerate certainty. Ask for a surety release upon owner acceptance plus a defined claims tail, such as 120 days following final payment, provided no notices have been filed. If warranty claims can trigger bond exposure, try to limit the bond’s scope to completion only, not latent defects. Where a broader scope is unavoidable, schedule and fund a warranty reserve that you control, with the surety’s rights limited to that reserve absent fraud or gross negligence.
When to walk away
Sometimes the best risk management move is to pass on the bond or the deal. If a surety demands unlimited personal indemnity that sweeps in spouse and family trust assets, insists on immediate collateral equal to 25 percent of the penal sum at signing, and rejects all process protections, it is pricing a default it thinks is inevitable. On a long, thin-margin job with a combative owner, that is a red flag, not a challenge to your negotiating prowess.
Walking away is easier if you have alternatives. Cultivate relationships with multiple surety brokers and underwriters. Keep your financial statements timely and CPA-reviewed. Close out small bonds cleanly and build a no-loss story that gives you options when you need them.
Final thoughts that help in the real world
The indemnity behind a completion bond is not just legal scaffolding. It is a live risk instrument that can affect your cash flow, your control of the project, and your balance sheet long after the ribbon cutting. If you treat it as standard form, you will discover its power when you least want to. If you engage it deliberately, you can turn the surety into an ally when things wobble.
Learn the clauses that move money. Negotiate proportion and process, not fantasy protections the market will never give. Align lender, owner, and surety documents so they do not work at cross purposes. Build contingency and habits that spot trouble early. And remember that the surety’s business model depends on developers who finish their axcess surety reviews work and repay what needs repaying. If you look like that developer on paper and in practice, you will get the bond you need on terms you can live with.