Payment Bonds vs. Performance Bonds

Payment Bonds vs. Performance Bonds

In this corner we have an $8.4 million bond, created & executed to protect you in the event the principal does not pay as promised! Please welcome PAYMENT Bond! And in this corner, we have an $8.4 million bond, created & executed to protect you in the event the principal does not perform as promised! Please welcome PERFORMANCE Bond!

Let’s…Get…Ready…To…

Clarify the differences between payment & performance bonds! (Admit it, you read this to yourself in the loud announcer voice.)

What is the Difference between a Payment Bond and a Performance Bond?

A payment bond is a promise of payment and a performance bond is a promise of performance.

• A payment bond is a surety bond, most often on public projects, issued as assurance of payment to certain parties should the principal of the bond breach their construction contract.
• A performance bond is a bond issued to one party of a contract as a guarantee of the performance of the other party to meet the obligations specified in the contract.

When Should I Make a Claim Against the Payment Bond?

The answer to that is simple – how long are you willing to wait for payment? Although each state has guidelines for when to serve a bond claim and to whom the claim should be served (often the deadline is 90 days from last furnishing), the real question should be “Are you willing to wait 90+ days for payment?” IF the answer to that question is “No way, I don’t want to wait 90 days or more for payment!” then you should proceed with a claim against the principal’s payment bond sooner rather than later.

How Do I Know if a Bond Has Been Issued?

In some cases you may uncover surety or bonding information when you obtain a copy of the Notice of Commencement or while gathering job information. Otherwise, you could inquire with the owner of the project, ask the bond principal (i.e. the GC) or even hire an outside vendor to proceed with a bond investigation.

Some public entities, like Texas Department of Transportation, provide a list of active construction projects on their website. The information provided may include the project name/location, the costs affiliated with the construction and the name of an individual you can contact for further information.

Best Practice

When securing your receivables, it’s important to obtain a copy of the payment bond, and often easiest to obtain a copy at the start of a project. It’s possible to obtain a copy just before you make a claim, but once payment problems arise, folks tend to be more reluctant to cooperate and provide copies of bonds. Also, there may be cases where your credit decision might hinge on whether or not a project is bonded.

Bear in mind, each state has its own statute dictating whether or not payment bonds are required as well as the steps necessary to secure your right to make a claim against the payment bond.