Payment bonds and performance bonds protect the interests of workers and clients.
Payment bonds and performance bonds are two categories of surety bonds provided by contracting companies to their clients, workers and suppliers as protection in the event of wrongdoing. Payment bondholders and surety bondholders are entitled to specific rights if the contracting company fails to follow through on its contractual obligations.
Surety Bonds
Surety bonds are third-party promissory documents submitted by a service provider to a client as part of a contract. A surety bond demonstrates the underwriting third party's (e.g., a bank) pledge to compensate the client without hesitation in the event of wrongdoing by the contracting company. In the context of surety bonds, wrongdoing may constitute breach of contract, failure to pay project costs, and failure to enter into a contract as the lowest offer in a competitive bid.
Performance Bond
A performance bond is a surety bond submitted by a contracting company to its client prior to beginning work on a project. The performance bond ensures that the client will be compensated up to a specified amount in the event that the contracting company fails to complete the project according to the terms of the contract.
Performance Bond Rights
A performance bond entitles its holder, the client, to solicit payment from the third-party underwriter if it is not satisfied that the related project was completed in conformity with the contract. A court typically assigns a dollar value to the incomplete work, after which the performance bond's underwriter compensates the client accordingly.
Payment Bonds
A payment bond is a surety bond issued by a contracting company to its workers, applicable subcontractors and suppliers. A payment bond ensures that these parties will be properly compensated in terms of payments and salaries in the event of incomplete or untimely payment for products and services rendered in the course of a project.
Payment Bond Rights
The rights granted in connection with a payment bond are similar to those associated with a performance bond. If a contracting company does not fulfill its payment obligations, then workers, subcontractors and suppliers may make a claim on the payment bond for the amount owed. Similar to a performance bond, the amount of compensation may be less than the full amount of the bond.
