Payment Bonds vs. Performance Bonds

payment and performance bond

If you are a contractor that works in the construction industry, surety bonds will be a big part of your career. Many jobs, whether for residential, commercial, or government clients, will require you to get a surety bond before any work starts. And that’s not the case for just one bond – it’s for many types of surety bonds. 

Getting the right bonds in a timely manner is of huge importance for contractors trying to find projects and win out over competitors. Understanding the obligations that come with those bonds is equally important. Surety bond requirements exist for a reason, and they come with hefty obligations and consequences, making it vital for contractors to know everything involved with bond agreements. 
In this blog, we’ll start with the basics and then do a deeper dive into two common (and often confused) surety bond types – payment bonds and performance bonds. Most contractors will need one or both of these bonds multiple times over the years, and possibly for every single job they work on. Read on to learn more about payment and performance bonds.

Bonding Basics for Contractors

Surety bonds make a contractor liable for misconduct. The exact details depend on the different kinds of bonds, but the basic purpose is always the same: if a contractor does something that results in damages for another party, that party may file a claim against the bond for compensation equal to the damages.

In such a scenario, the contractor must pay for any claim. However, if they can’t or won’t settle, the surety that issues and backs the bond will settle instead. In that way, surety bonds guarantee that someone negatively affected by a contractor gets a settlement to recoup their losses. If and when the surety pays for a claim, the contractor still has the financial liability. That means the contractor must repay the surety in a timely manner and with interest and fees added to the debt. 

Failure to repay could result in a lawsuit or collections. Worse, if a contractor has caused bond issues in the past, it can be harder to secure bonds for future jobs, putting their livelihood in jeopardy. That’s why contractors must understand what bond agreements entail in order to follow those agreements properly. We will cover more on payment and performance bonds below. 

Common Kinds of Contractor Bonds

In addition to performance bonds and payment bonds, contractors may need other kinds of bonds that are common throughout the industry. For example, a contractor’s license bond is something an individual must get to be granted a license by the state. Another example, bid bonds, are often required when submitting bids for work.

The career of a contractor starts, in many cases, with getting a surety bond, and involves dozens more after that. Since bonds are such an important part of the industry, many contractors find a trusted surety agency to supply them with all the bonds they need at competitive rates and with minimal hassles. Bonding may be required, but it doesn’t have to be a headache with the right partner. 

What is a Payment Bond?

A payment bond holds a contractor liable if he or she does not pay suppliers and subcontractors the amount they are owed under the contract. In the event of nonpayment, a supplier or subcontractor may file a claim against the payment bond for the amount they are owed. The surety will investigate the claim to confirm that payment was in fact missing. If the contractor still refuses to pay at that point, the surety will settle the claim before turning their attention to collecting the claim amount from the contractor with the payment bond. 

What is a Performance Bond?

A performance bond holds a contractor liable if he or she does not meet the performance standards mandated by the work contract. For instance, if a contractor agrees to finish a job by a set date, complete the work within a strict budget, or meet exacting quality standards, and then fails to follow through on those expectations, it causes financial consequences for the party that hired the contractor. That party may then file a claim for damages against the performance bond. Upon validating the claim, the surety will settle it if the contractor can’t or won’t. However, as with all surety bonds, the contractor must repay the surety the claim amount with interest and fees added. 

The Difference Between Payment Bonds and Performance Bonds

When it comes to performance vs payment bonds, the mechanics are the same: contractors must take financial responsibility when they fall short of their contractual obligations. The primary difference is what those obligations entail.

In the case of payment bonds, contractors must pay their suppliers and subcontractors, on time and in full, or else there could be claims filed against the bond. With regard to performance bonds, ontractors must meet all the performance standards specified in a contract or else take responsibility for the damages that result. 

A contractor may also need both performance bonds and payment bonds on a single job. Whatever the case, work cannot start until a contractor can prove they have the required bonds in the required amounts. 

How to Obtain Performance and Payment Bonds

Step one is finding a surety agency to work with. Surety agencies act as an intermediary between bond seekers and bond providers. By working with a surety agency, a contractor is able to streamline the bond process, get multiple bond offers, and compare those offers to find the most competitive one. To put it differently, surety agencies make it easy to get the best bond offer available. 

Obtaining a surety bond through a surety agency can vary depending on the agency and the size of the bond, but it unusually involves only a few simple steps:

  • Complete a surety bond application
  • Submit to a credit check
  • Meet the bond requirements 
  • Submit any other documents the surety requests

Based on this information, underwriters at the surety will quote the cost of the surety bond. Most bonds cost a small percentage of the total coverage value based on the bond seeker’s credit. That means people with bad credit will pay slightly more. Make sure you get a competitive rate regardless of your credit by taking advantage of a special program we offer at Viking Bond Service. 

Viking Bond Service for All Your Surety Bonds

We can help you get performance bonds and payment bonds – along with bid bonds, license bonds, and any other bonds a contractor might need. Contractors in all 50 states make Viking Bond Service their surety bond partner of choice. Find out why for yourself. Get a quote for a bond in under 24 hours. Or get more information immediately – call 1-888-2-SURETY (1-888-278-7389) or contact us with your questions today!