Payment Bonds

A payment bond is a surety bond issued to contractors that guarantees that the contractor will pay their subcontractors, material-suppliers, and laborers timely in accordance with the terms of their contracts.

Payment bonds are usually obtained by contractors or subcontractors prior to the commencement of a construction project. Their function is to guarantee that the labor and materials provided by subcontractors and suppliers to a general contractor will be paid for timely and in compliance with the contract. These bonds also guarantee that payments for labor and materials will comply with state and federal laws and regulations.

Payment bonds serve as protection for subcontractors, and offer them legal recourse against contractors who do not fulfill their end of the contract. If a contractor has failed to pay, subcontractors, suppliers and laborers can file a claim against the payment bond within a certain period of time and receive compensation by the surety. In short, payment bonds are an agreement between the oblige requesting the bond (the subcontractor, suppler or laborer), the principal who obtains the bond (the contractor), and the surety bond company underwriting the bond.

Once a claim is initiated the surety investigates in order to determine whether any action must be taken. If the claim is legitimate,obliges can expect to be compensated for their losses up to the full amount of the payment surely bond.

Small contractors often cannot qualify for a payment bonds because the requirements are strict.

Performance Bonds

A performance bond guarantees that a contractor will perform the work according to the conditions and requirements of the construction contract. These bonds protect the owner from financial loss as a result of a contractor default.

Performance bonds also protect the owner from substandard work, or work that doesn't meet the contract requirements. They are usually required on public projects, but are also sometimes required by owners on large private projects as well.

The general contractor is typically the principal on a performance bond, with the owner as obligee. The project owner can make a claim against a performance bond If the work isn't being completed according to the contract requirements.

Parties to a Bond

There are three parties to a construction bond:

• Principal
• Surety company
• Obligee

The principal is the person or company purchasing the bond. On most projects, this is the general contractor or a subcontractor.

The surety company provides the bond for the project. This is the party responsible for arranging for the completion of the contract if the contractor fails to perform.

The obligee is the party protected by the bond. This party is usually the property owner, public agency, or other party requiring the bond.