You are one of Five Contractors all bidding on the same job.  Like each one of your competitors you have secured a Bid Bond in order to deliver your bid. 

You Win the Job! Congrats! Now what? You will need a Performance and Payment Bond.

Performance Bond

Where a Bid Bond ensures the “good faith” of a Contractor’s work-bid, a Performance Bond ensures monetary compensation to the client in the event the Contractor fails to finish the project according to the specifications laid out by the contract (most often due to the default or bankruptcy of the contractor).

If the Contractor does default the Surety or Bond Carrier has three options:

1. Complete the Contract obligations itself through their own Contractor,
2. Select a new Contractor with whom the Client will form a new Contract,
3. Allow Client to complete work by their own method using Bond payments.

The face value of a performance bond is generally 100% of the contract amount, and the face value is generally increased for each change order.

Payment Bond

Most often Performance Bonds are underwritten as part of a “Performance and Payment Bond”.  The Payment Bond guarantees that the contractor will pay the labor and material costs they are obliged to under the contract.  This benefits the Client so if a General Contractor defaults subcontractors and suppliers assured of payment and will continue performance as contracted. 

The face value of a Payment Bond is often less than the total amount of the contract, and is intended to cover anticipated subcontractor and supplier costs and in some cases mechanics’ liens.

“If you’d like to talk about your Insurance Risk, contact me today. We can talk about your exposure, and begin our relationship!”

Thank you,

Ryan H.

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Related posts:

1. Bid Bonds
2. Builder’s Guide to Construction Bonds
3. Is He/She Really an Independent Contractor?
4. Contractors: Your Work is NOT Covered
5. Contractors: Pay Your Workers Comp or Else!