Newbies to the construction or contracting industry often find themselves wondering about the nature and purpose of payment bonds. Also, many tend to confuse it with the performance bond.
A Guide to Payment Bonds
First of all, a payment bond is a type of surety bond. While most contractors get them to comply with requirements, their primary purpose is to ensure that the suppliers and subcontractors are paid on time and according to the contract. Think about it as an assurance to everyone that the project will be completed lien-free.
Payment bonds provide subcontractors with a legal recourse in case the main contractor doesn’t live up to their end of the bargain. Should a contractor fail to pay the suppliers and laborers as agreed, the other party can file a claim against the bond for compensation from the surety.
The Difference Between Payment and Performance Bonds
Though they are often used in conjunction and purchased in the same package, payment, and performance bonds are not the same.
While a payment bond guarantees that subcontractors and suppliers will be paid as promised, a performance bond helps make sure that all the duties stated in the contract are performed to standards. If the client proves that work was not done to agreed specifications, the surety will compensate for the claim and then recover the amount from the contractor.
In need of a payment bond?
As per the Miller Act, all contractors of federally-funded projects must have a payment bond. Most private construction contracts also require payment sureties from their prime contractors.
However, even if a particular project does not require you to furnish the bond, it would be wise to do so still. This will boost your credibility in the industry and help you draw better subcontractors to your projects.
If you need a payment bond for an upcoming project, speak to one of our bond experts at Bennett and Porter.
Contact us now!