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Performance and Payment Bond

Performance and Payment Bond

Payment and Performance Bond 

Payment and performance bonds are often required of contractors by a hiring organization or individual, as a means of ensuring that contractors and subcontractors involved on 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 which 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.

[NFP Surety is the leading provider of all types of construction related bonding solutions.  Contact our office to learn more about our easy bonding process.}

How performance and payment bonds work 

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

The city of Buffalo, NY 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 to do their respective parts of the overall construction involved. Midway through the project, the head contractor suffers a car accident requiring months of rehabilitation and disqualifying him from further involvement on 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 sub-standard, because he failed to observe Buffalo city ordinances in some of the materials used.

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

Who needs a Payment and Performance Bond?

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 completion of the project, it’s only logical that this would be the person who should take on the assurances associated with the payment & performance bonds.

This guarantees that the hiring organization does not 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 you need to get bonded

There are several reasons why you might want to get bonded as a professional contractor, hiring out your services to consumers or to 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 in order 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.

Contractor Surety Bonds

Industries that require contractor surety bonds

Almost every industry in this country makes use of surety bonds, and it’s not hard to understand why that would be. Since surety bonds provide protection to one or more parties in a work agreement, they can serve as 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 NFP Surety for a free consultation, learn performance and payment bond definition, and let us show you how to get properly bonded in your state!

Government organizations are also major users of surety bonds, partly because they have an obligation to taxpayers to account for all work contracted, and to ensure that quality work is delivered in exchange for taxpayer funding. Every level of government from the lowest on up to the federal government itself is under this same obligation, to deliver quality public works on time, so that the public receives full value for the funding provided to the government.  We hope this helps explain performance and payment bond definition.  NFP Surety is here to help, and teach you how to properly get your contractor surety bond.

Examples of how/why bonding is important

There are several reasons why bonding can be very important, in many different kinds of industries:

  • They can be used for marketing, since a bonded contractor is backed by a financial guarantee
  • Surety bonds act as contracts which are legally enforceable, and hold principals accountable
  • Failure to live up to a bond carries powerful penalties for a contractor, which serve as motivation for compliance
  • Surety bonds are often used as a first step toward licensure in a given state for the offering of professional services

Related terms

  • Commercial bonds – those bonds which are required by businesses, as opposed to contractors for a guarantee of work completion
  • Damages – the financial amount sought by an obligee against a bond, as a result of incomplete work, shoddy work, or non-compliance
  • Fidelity bonds – those bonds used to protect an employer against employee dishonesty and related acts
  • Fiduciary bonds – bonds which guarantee that a legal executor will perform his duties in accordance with state or relatives’ wishes
  • Indemnification – an agreement which stipulates that a specific party will not be held accountable for any damages or losses
  • Premium – the amount of money paid by a principal for a bond
  • Rates – the dollar value percentage used to determine the premium cost of a bond
  • Penalty – the monetary obligation required by a bond – a complete default would carry a 100% penalty, and anything less would impose a lesser penalty
  • NFP Surety for all your payment performance bond needs!

If you are in need of a contractor surety bond, contact the professionals of NFP Surety today!  Let us set up your payment & performance bond today!  You’re going to love our quick and easy bonding process…we’re sure of it!


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