Performance bonds and payment bonds are two of the most common and important surety bonds you’ll deal with on a regular basis in your construction or contracting business. They provide not just peace of mind and a good reputation for you, but vital coverage should something go wrong on the job and you’re not able to meet your obligations.
It’s essential, however, that you understand the differences between these two bonds so you know when one needs to be used, and how they cover you when you need them. Learn the key differences in the performance bond vs payment bond question, and where you can go to be sure you’re properly bonded for every project.
Performance Bond vs. Payment Bond
Think of any contracting job as a sort of pyramid with three levels. At the top of the pyramid is the principal. This is the person or entity who needs work done—if you’re doing a highway construction project, the state DOT might be the principal, for example. At the middle is you. You are the obligee, or the entity who agrees to do the contracted work.
Then, at the bottom of the pyramid is the entire network of subcontractors, suppliers and vendors you have to call upon to get the job done. You need to guarantee the principal that you’ll do the job, and you need to guarantee that network at the bottom that they’ll get paid. Performance bonds cover the top end, and payment bonds, the network at the bottom.
One of the most important bonds in the construction industry, a performance bond is almost always required for a business to be able to bid on government projects. If something goes wrong and you find yourself unable to complete the job, the performance bond will pay off the principal so they can recoup their losses and find someone else to finish the work.
This payment is not insurance; it’s a loan. You will have to pay it back. In addition, the more often you use a bond, the harder it is to get new bonds, and the more you’ll have to pay in principals.
A payment bond, on the other hand, is a promise that you’ll pay for all the supplies, materials and work you get from your network of suppliers and subcontractors. These can file a lien against your payment bond to make sure that they get paid in the end, making payment bonds more frequently used than performance bonds, though no less important. Like performance bonds, they’re required when bidding on government contracts.
Regardless of whether it’s required by law, it’s often a great idea to get bonded on any job you undertake. It provides confidence, peace of mind, and shows you have a reputation for backing up your work. Check out some more information on the difference between a performance bond vs payment bond, and then contact National Surety Services, Inc, to take advantage of our 20 years of experience in surety bonding for businesses of all size across the nation.