PERFORMANCE & PAYMENT BONDS
WHAT IS A PERFORMANCE BOND?
A Performance Bond is a type of surety bond used in contractual projects to ensure that the contractor adheres to all the terms and conditions of the contract and delivers the work on time. It also makes sure that the contractor does not go beyond the budget and meets the deadline.
Like other surety bonds, performance bonds are an agreement between three parties. An example would be a commercial business that needs some remodeling work done and hires a construction contractor.
In this case, the bond would be between the contractor (principal), the business owner (obligee), and the person who issues the bond (surety company). The bond protects the business (principal), and the contractor has to sign a performance bond before getting the license to start work.
If the contractor does not finish the work on time, asks for extra money, or does not follow the contract, the bond can be claimed by the obligee, and the surety company can grant the compensation to the obligee. However, the principal will have to reimburse the bond company later.
If the contractor completes the job on time and adheres to the contract, the bond becomes null and void.
WHAT IS A PAYMENT BOND?
Payment bonds are a type of surety bond required by contractors to guarantee that all parties involved in the project, including the subcontractors, material suppliers, and workers, will be paid, regardless of the project’s completion. The cost of these is based largely upon the job's contract value, and they should be presented along with performance bonds. Therefore, all contractors who want to find work in their state will need to be eligible for these bonds.
Since it is difficult to predict a project's outcome and its completion, project owners usually require Payment Bonds. Generally, all the parties involved with a project are paid when the project is completed as per the given specifications.
Payment bonds are typically issued with a performance bond. Having a payment bond in place protects the obligee from being held responsible if the principal does not pay their subcontractors. If there is any default on a payment, the payment bond guarantees that all parties will be paid for their services regardless of if the project is completed or not.
HOW MUCH IS A PERFORMANCE & PAYMENT BOND?
A performance and payment bond's cost will vary from less than 1% to over 3% of the full contract amount. The cost is very much dependent on the level of assurance the principal can provide. Factors considered include the contractor's credit, financial statements, bond amount, and how often the contractor will need a bond. Every state has its own requirements, while federal projects typically require a performance bond when the obligation is over $150,000 but also can be decided by the contracting officer in some cases.