Payment bond vs performance bond
A payment bond is a type of surety bond that guarantees a contractor’s material suppliers and subcontractors will get paid according to the contract. It is very often used on public projects where mechanics liens are not allowed.
A payment bond is also a type of contract bond, and many sureties sell them together with performance bonds. When a contractor wins a public job and posts a bid bond as part of the process, they often need a performance bond and a payment bond.
On the other hand, when one party to a contract guarantees that it will carry out its obligations under the terms of the agreement, it may require the other party to the contract to post a performance bond as financial assurance. Sometimes this kind of bond is referred to as a “contract bond” instead.
Although payment and performance bonds have certain similarities, they are not the same. Given that they are often bought together and either one or both may be necessary after a bid has been won, distinguishing between them is often difficult.
Having a payment bond in place guarantees that a contractor will pay their subcontractors and material suppliers in a timely manner. Project owners may be certain that their contractor will carry out their duties in accordance with the terms of the contract – thanks to performance bonds. As a rule, public projects need not only payment bonds but also performance bonds.
Does one’s credit rating truly make a difference?
In contrast to the vast majority of other types of surety bonds, performance and payment bonds do not have any sort of a “poor credit” scheme. But, under certain conditions, contractors whose credit isn’t perfect but isn’t terrible may often nonetheless get the necessary bonds to protect their business.
The costs of performance and payment bonds
In the case of payment and performance bonds, prospective bond holders are not required to pay the bond’s full face value. Applicants are instead required to pay a bond premium, which is a modest sum expressed as a percentage of the total bond amount. This premium is often referred to as the bond cost or the bond price from time to time.
The applicant’s personal credit score as well as the size of the contract both have a role in determining the rate that the application will be required to pay for their premium.
The premium for a small to medium-sized performance bond typically amounts to around 3 percentage points of the total bond value. Yet, rates may be as low as one percent of the total bond amount for considerably more substantial contracts.
Comparisons of their similarities and contrasts
There are a few key distinctions between payment bonds and performance bonds. Since they are both surety bonds, they function in the same manner that other surety bonds do; hence, they are comparable.
- Both of these are necessary in building projects and are often utilized for the safety of employees who are employed by contractors.
- Contractors and their employees are both safeguarded by payment and performance bonds, although the beneficiaries of the former are the business entities employing the former.
How payment and performance bonds work together
A performance bond serves to safeguard the property owner in the event of a contractor default. The purpose of payment bonds is to assure the general contractor’s hired subcontractors, suppliers, and workers that they will be paid for their services and supplies.
Whether the project is public or private, a payment bond and performance bond are often issued together. When it comes to surety bonds, the same entity that backs the project’s bid bond usually backs the payment bond and the performance bond as well.
A surety will not give a bid bond to a contractor if the surety has already decided not to issue a performance bond. When a surety underwrites all three bonds, it is demonstrating its confidence in and support of the contractor.
Frequently Asked Questions
When are payment and performance bonds given out?
In addition to the payment bond, what additional bonds are required along with it?