Toll Free: 866-430-3322 7:30AM - 4:30PM MST
Performance Bond VS Payment Bond
Simply put, a performance bond ensures performance and a payment bond ensures payment.
A performance bond is a type of surety bond that guarantees that a principal will fulfill their contractual obligations under a project to satisfactory performance.
A payment bond is a type of contract surety bond that guarantees a contractor or subcontractor will pay their subcontractors, material suppliers or laborers for the work and materials provided. Should the principal of the bond breach their construction contract, the payment bond acts as an assurance of payment to certain parties are issued.
In short, the difference here is that a payment bond ensures payment to people and for materials, and a performance bond ensures performance is done to specifications per the terms of the contract.
Well, how long are you willing to wait for payment? Each state has guidelines for when to serve a bond claim and to whom the claim should be served as the deadline is often 90 days from the last furnishing. However, the real question is if you are willing to wait at least 90 days for payment? If your answer is “not a chance”, then you should proceed with a claim against the principal’s payment bond sooner rather than later.
Your performance and payment bonds’ cost is determined by a few case-specific factors.
One of the main factors is the amount of the contract which has been awarded during the bid. Your bond cost will vary accordingly.
To obtain a bond, contractors only pay a premium which ends up being a fraction of the full amount. A surety bond company must look at the size of the contract, personal credit score, and financial of the applicant. Small to medium-sized performance bonds typically cost around 3% for an annual premium. However, for much larger contracts, rates can be as low as 1% of the bond amount.
For construction projects over $250,000, the surety takes a more comprehensive look at the contractor, financial health, project history, experience, and other active bonded projects to determine the price of their bond.
One option for you is to inquire with the owner of the project. Additionally, you could ask the bond principal, or hire an outside vendor to investigate the bond. In other cases, you may even find bonding or surety information when you obtain a copy of the Notice of Commencement or while gathering job information.
Contract bonds require an intensive understanding and kind of underwriting than other types of bonds. On top of this, they are time-sensitive. Choosing to work with an accredited bonding company can only save you time and money – avoiding the unavoidable back and forth inexperienced agencies can put you through.
If you are looking for a bond, please reach out to us. One of our experts will contact you shortly with further information about the process. If you want to learn more about bonds, please visit our surety bonds information page.
We believe in people first for a lasting partnership.
Surety Place is the first bond only placement service whose sole purpose is to build a partnership you can trust and provide market access to deliver balanced bond portfolios at a time when automated systems and P&L’s matter more than people. Over many years, Surety Place has built, added to and continued to perfect, programs and services to help business owners and agents quickly identify the best surety fit and find solutions when it seems like there are none.
Whatever your bonding needs, The Surety Place is here to help. Give our dedicated account managers a call today.