Performance and Payment Bond

When it comes to understanding performance and payment bonds, their names help clarify their functions. The purpose of a performance bond is to guarantee that construction contractors will indeed perform the work specified within their contract documents. While payment bonds guarantee that subcontractors and suppliers will be paid for the work and supplies they provide on a project. Payment bonds are not required for all projects. However, it is federally mandated that those topping the $100,000 figure have surety bonds in place at their commencement. These two types of bonds protect a great number of business entities from non-payment, partially completed projects, and unfair property liens. Payment bonds are also required for all public projects because while subcontractors and suppliers can place liens on public property, it is against the law for liens to be applied to public property.

Imagine if a homeowner contracts with a general contractor to build a new home. The subcontractors who are working for the general contractor performs the work, but is not paid for their efforts. Without a payment bond, the only recourse a subcontractor would have, would be to put a lien in place on the homeowner’s property. However, the existence of a payment bond means that the subcontractors can issue a claim through the surety company for the amount of their fees.

On the other hand, a performance bond would protect the homeowner from a general contractor who may be dragging his/her feet on a project and slowing it down so that the completion date is not met, or from a contractor who may have abandoned a project. The homeowner can then file a claim with the surety company which will compensate the homeowner for their client’s breach of contract.

Both performance and payment bonds can be purchased from surety companies or insurance companies. The amount of coverage is dependent upon the total cost of the project and the contractor’s credit history. More expensive bonds can be purchased to protect those contractor’s with credit issues. These bonds are typically purchased prior to the signing of the contract to demonstrate good faith.

Understanding performance and payment bonds can help take some of the worry out of construction projects, whether private or public.