As you set out to get your company bonded for your next project, it’s important to understand the different kinds of bonds you’ll face. Two of the most important are performance bonds and payment bonds. While both are likely required for government projects under your state’s Little Miller Act, many contractors are confused at the difference between the two.
It’s vital that you understand these differences so you can always be in compliance with state and discover the many reasons why it’s important to understand the difference between a performance bond and a payment bond, and where to get bonded today.
Difference Between Performance Bond and Payment Bond
The real, major difference between performance bond and payment bond is pretty straightforward. A performance bond benefits the principal (the person with whom you are contracting) and guarantee that you will finish your obligations under the contract. A payment bond benefits your suppliers and subcontractors, guaranteeing payment for the labor, services and materials they provide you.
Different Bonds for Different Reasons
As the obligee on a contract, or the primary contractor, you have a lot of responsibilities. Your major responsibility is to the principal, or the person to whom you’re providing services. You have an obligation to do what you agreed to do, whether it’s constructing a building or doing work on a lot.
Likewise, you have a responsibility to any subcontractors you bring onto the job. You need to pay them fairly for the services they provide, under a contract you create with them. Finally, you have an obligation to pay your vendors and suppliers for the materials they provide you.
Should you fail to live up to these responsibilities it can cost vast damage, sometimes into the millions of dollars. The right bonds will cover such failure if it arises.
A performance bond exists for one reason: to provide monetary compensation to a principal if you fail to live up to your obligations. This money allows them to seek restitution for their losses and seek another party to finish the job. Meanwhile, you are on the hook to repay the bond if you have to use it—it’s a loan, not insurance.
Payment bonds fall under the category of liens. They are used much more frequently than performance bonds are. Anyone who provides labor or materials to a bonded project can file a lien against these kinds of bond. This allows them to file a claim against the bond if they don’t receive payment as agreed under your contract with them.
Getting Your Project Bonded
The difference between a performance bond and a payment bond is fairly straightforward. If you think of your project as three tiers with you in the middle, the principal at the top, and the vendors, suppliers and subcontractors at the bottom, the performance bond covers the top, and the payment bond covers the bottom.
If you’d like more information about these two types of bonds, and how you can get started fast and easy, National Surety Services, Inc., can help. Check out some more information about the bonding process, and contact us to get started today.