Payment and Performance Bond

Both bonds are often required of contractors by a hiring organization or individual as a means of ensuring that contractors and subcontractors involved in a given project provide quality workmanship, and are properly paid by the head contractor. A government organization or possibly a municipal or state group will commonly protect itself against the uncertainties that might arise on a significant construction project by requiring a head contractor to purchase performance and payment bonds.

This guarantees that the government agency itself is not left holding the bag. In the event that the contractor abandons the work, goes out of business, or fails to meet his obligations on the project, the hiring organization does not suffer financial loss.

The benefit provided by these bonds is that they cover unanticipated conditions that might occur during a major project so that individuals or subcontractors involved don’t lose money and time if the lead contractor defaults on his agreement. The overall hiring company is also protected against financial losses because of how performance and payment bond work. To illustrate how these kinds of bonds would work in actual practice, consider the following example.

The city of Buffalo, New York, hires a head contractor to accomplish the work of building a new hotel on the Lake Erie waterfront. That contractor then hires an electrician, a plumber, carpenters, a concrete supplier, and a landscaper. Midway through the project, the head contractor gets in a car accident requiring months of rehabilitation and disqualifying him from further involvement in the project.

All the subcontractors had already purchased materials necessary for the work, but none had been paid for those supplies, although the work had been paid for up to the point of departure for the head contractor. In addition, the plumber’s work completed to that point was considered substandard because he failed to observe city ordinances in some of the materials used.

The city had required these bonds of the lead contractor before work was begun, so it was protected in this situation against the unfortunate results. The payment bond covered the cost of all supplies purchased by the subcontractors, and the performance bond covered the inability of the lead contractor to continue, as well as the inferior work done by the plumber.

Who needs payment and performance bonds?

The party most likely to need a performance and payment bond is the general contractor, just like in the example provided above. Since the general contractor has overall responsibility for the completion of the project, it’s only logical that this would be the person who should take on the assurances associated with the payment and performance bond.

This guarantees that the hiring organization doesn’t get held responsible for reimbursing subcontractors, suppliers and other laborers on the project. It also ensures that those same subcontractors, suppliers and laborers will not suffer financial loss should the general contractor default on the terms of his agreement.

Why should I get bonded?

There are several reasons why you might want to get bonded as a professional contractor who hires out your services to consumers or larger organizations. In some cases, getting bonded is an actual condition of eligibility, meaning that you cannot be considered for a job or project unless you are legally bonded. Many large employers and agencies now require bonding as one of their qualifying conditions, and non-bonded candidates are not even considered.

Some surety bonds are required by states for professionals and contractors to operate within the jurisdiction of the state. License and permit bonds are a good example of this kind of bonding, and they usually require bonded contractors to have gone through some level of training as assurance that they are qualified to offer professional services to consumers and hiring companies.

What industries require bonding?

Almost every industry in this country makes use of surety bonds, and it’s not hard to understand why. Since surety bonds protect one or more parties in a work agreement, they can serve as a powerful motivation for that work to be completed, to comply with any relevant laws or regulations, to be high-quality, professional work, and to be done within the specified time limit. The construction industry is one of the biggest users of surety bonding because it is so important that subcontractors and contractors complete their work according to the terms agreed upon, so that the overall project does not suffer, or fall behind schedule.

Call us for a free consultation, learn more about payment and performance bonds, and let us help you get properly bonded in your state.