What is a payment and performance bond?
A performance bond is a kind of financial assurance given by one party in a contract to the other party in the event that the first party fails to fulfill its responsibilities under the terms of the contract. A contract bond is another name for this kind of bond. To guarantee that a contractor will finish the work that has been assigned to them, a financial institution or an insurance company would often issue a performance bond.
It is typical practice in the construction and real estate development industries to use performance bonds. In these kinds of circumstances, an owner or an investor could demand the developer to ensure that contractors or project managers get performance bonds. This is done to ensure that the value of the work will not be lost in the event that an unexpectedly unfavorable occurrence occurs.
On the other hand, a payment bond is a kind of surety bond that is placed by a contractor to ensure that all of the contractor’s subcontractors and material suppliers will be paid for their work on the project. They are necessary for any contract with the federal government that is worth more than $35,000 and must equal the whole amount of the transaction. In combination with performance bonds, they are often needed to be submitted.
In essence, the issuance of a payment bond and a performance bond occur concurrently. Payment bonds are a guarantee that certain individuals will be paid, while performance bonds are a guarantee that a project will be completed as agreed, including being done by the agreed-upon date. Both performance and payment sureties ensure that relevant rules and regulations are followed, although payment sureties are more common.
Recovery under the bonds is sought by the subcontractors, the sub-subcontractors, the workers, and the material suppliers. In many instances, professionals in the construction industry, such as architects, also have legal options available to them under the construction payment bond. The proprietors of a project may file a claim against a surety bond in the event that the project was not finished in its whole or at all. When work is not finished by the dates that were agreed upon, this will often trigger a condition known as “liquidated damages,” which requires the contractor to deduct a certain cash amount every day from the price of the contract. At NFP, we will only ever bond with the highest-rated carriers.
How submitting a bond claim helps in contractor payment?
When a project participant, such a subcontractor or material supplier, has a problem with payment on a project, filing a bond claim may be an extremely successful strategy to collect payment for the participant. Payment bonds provide parties involved in construction with the opportunity to get paid without having to resort to the final step of having the property sold at auction. While legal action may still be taken, recovering from a large sum of money is not fundamentally different from recovering from the property itself; in fact, it may be more convenient and less time-consuming.
Participants in a performance bond agreement
As will be seen in the following paragraphs, a performance bond is an arrangement that involves three parties.
The person or corporation that is delivering a service is known as the principal; in most cases, this will be a contractor.
The person that is providing payment to the principle in exchange for the principal carrying out some job is known as the obligee.
The party who guarantees that the principal will finish their task is called the surety, and they are the ones who issue the performance bond. In the event that the principal suffers from a partial or complete failure, the surety will pay any extra expenses for the completion of the project, subject to the limitations that are specified in the performance bond.
How much does a payment bond cost?
It is possible to demand payment bonds on its own without also requiring performance bonds to be bundled together, however this is not the norm. At the time of the bid process, you will need to acquire the payment bond, and when the project has been granted, you will need to provide it to the owner. In most cases, payment bonds will include stipulations on the timing and amount of payments to be made to workers, suppliers, and subcontractors. While it is predicted that the premium for payment bonds issued in conjunction with a performance bond will be between 1% and 2% of the total bond amount, the actual cost may vary based on the credit history and background check conducted on the contractor who requests the bond.