Although they are often
packaged together, payment and performance bonds serve very different purposes.
Together, they work to ensure that a project is completed on time, on budget,
and is lien free upon completion. In
any surety bond, there are three parties involved: the surety company who issues the bond, the owner of the project, and the principal,
which is usually the general contractor.
The owner will usually require the
contractor to obtain a payment and performance bond before the contract is
signed. Surety bonds protect the financial security of the owner, but also have
added benefits for subcontractors. The cost of these bonds are generally
considered and included in the amount of the project bid.
What is the difference
between these two types of surety bonds with Floyd Arthur? They are both surety bonds and also types of contract
bonds, which means a third party is guaranteeing the contract will be upheld
but there are some major differences.
First, a performance bond is a bit more
complicated than a payment bond. A performance bond ensures the job will be
completed within the time frame that was agreed upon, with the plans that were
agreed upon, and for the amount of money that was agreed upon in the original
contract. Essentially, it functions as a guarantee to ensure that all parties
abide by the original contract. If the contract is violated, the owner has a
few different routes to take in regards to the surety bond. First, they can
force the general contractor to abide by the contract, they can hire another
contractor to replace them, or they can agree to complete the project with the
surety footing the bill. Surety bonds do not protect the general contractor
from being forced to pay out of pocket, they guarantee payment if they cannot
pay.
A payment bond serves a
different purpose. The beneficiaries of this bond are actually the
subcontractors and the material suppliers. The payment bond ensures that all
the workers and suppliers involved in the project are paid all they are owed on
time. This way the owner knows there will be no leans on the project or
property at completion. However, it also benefits subcontractors who know they
will get paid the money they are due.
