Understanding the Difference between Payment and Performance Surety Bonds

Some people confuse the definition of payment bonds and performance bonds, although frequently required in conjunction with each other. For a contractor entering the bidding arena understanding these bonds can be crucial in the completion of various private and public projects. In public projects contractors also create a legal obligation. However, a convenient way to obtain the right bond for a contractor´s needs is by hiring performance bond construction contractor services. These services offer solutions for all contractor concerns with the least amount of hassle and can guide construction professionals in securing the right type of bond. A surety company can ensure and approve the financial/credit strength, character references, and equipment used by any contractor. Because payment bonds are not insurance policies, if the surety company pays a claim, the contractor will be required to reimburse the claim. This can be confusing since it is usually an insurance company acting as the surety. 

A three-way contract between the surety company, the contractor and the owner is created for construction projects in order to guarantee timely payments by the contractor to laborers, material suppliers, creditors, and subcontractors. Contracts exceeding over $35,000 require bonds with the Federal Government and must cover 100% of the contract value. Government jobs prohibit the placement of any liens; therefore, these payment bonds create the utmost value. The payment bond is also an efficient protection in case of non-compliance by the contractor. Payment bonds can be considered as a natural extension of a performance bond. 

Playing an important role in construction projects, performance bonds are used to safeguard the contractor, owners, and the public. They also offer both legal and financial protection for the contractor and project owner and can increase the odds of a successful project completion. They provide several benefits to both the owner/oblige and contractor including guaranteeing losses due to contractor’s inability to pay for unexpected cost overruns. Regardless of the contractor´s financial condition, both the obliges and the suppliers are insured and paid. Corporations or governmental agencies often require performance bonds when taxpayer money is involved. Such examples can include bridges, highways, and roads. Usually issued for up to 20% of the contract amount, can be fixed by local law, performance bonds can also have a face value equal to 50% of the contract value. 

In addition, performance bonds offer advantages for the subcontractors and improve the reputation of the contractor because it means the contractor has passed an evaluation. Because tangible security is not required by the contractor, the contractor can also utilize their own assets for additional working capital or their own business growth. 
Working with a bond specialist can provide knowledgeable assistance and help grow a construction business by streamlining the process. The ability to gain an edge against competitors, expand credit and increase bond capacity is of utmost importance for business growth in the construction industry. By taking a proactive approach and working with a bond specialist, a construction professional can increase financial leverage and increase revenues.

 

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