Performance Bonds vs. Payment Bonds: What’s the Difference?

Published on February 16, 2021

By Dan Huckabay, President
Commercial Surety Bond Agency

Our mission at CSBA is to help contractors navigate the complex world of surety bonds so that they can win the jobs that will take their business to the next level. If you’ve recently launched your own company or are pursuing performance and payment bonds for the first time, we understand that you have questions about the process. 

We’ll start by helping you understand the difference between payment and performance bonds, and the role CSBA plays in alleviating the stress of bidding on new projects.

Performance bond basics

In the most basic of terms, a performance bond guarantees that a contractor will complete a project according to the contract specifications. A performance bond not only guarantees the completion of the work, it also covers any warranty or liquidated damages provisions of a contract. 

This is where the assistance of an experienced surety agency makes a huge difference. Knowing the ins and outs of contracts and any special requirements is key in understanding risk and opportunities for your business. 

Long-term warranties beyond 1 year are a great example of special circumstances that may appear in a contract. Many contractors don’t realize since the warranty is part of the contract, the performance bond covers the warranty in addition to the project completion.

Liquidated damages are another example. If a contract is not completed in the specified period of time and liquidated damages are assessed, the performance bond could be liable for those damages.

Performance bonds guarantee fulfillment of everything in a contract, and small details like warranty and liquidated damages need to be carefully examined and accounted for to ensure your company can deliver on every nuance of the contract.

 

What you need to know about payment bonds

In the simplest terms, a payment bond is a guarantee that everyone who works on the project is paid. This includes laborers, suppliers, subcontractors, and other lower tier subs or vendors. During the bonding process our surety agents take the time to clearly examine all parties on the contract. 

It’s important for contractors to realize that your payment bond is liable for not just your unpaid bills but those of your 2nd and 3rd tier subcontractors. Thus, your due diligence in selecting reliable subs is critical. Even partners you have successfully worked with in the past may now pose a risk, and our job as your surety advisor is to ensure all parties are vetted and aligned for your success.

Furthermore, the entity who awarded the contract must also be carefully evaluated to ensure they will deliver payment to you, the prime contractor. In the case of public work, funds are generally set aside and allocated specifically for the project. Private contracts, however, may be owner funded or financed by a loan. 

Understanding where the money for a project is coming from and how it will be paid out is a key factor in the underwriting process. At CSBA, we have a team of in-house underwriters who work on your project from start to finish, ensuring that all internal and external factors have been thoroughly evaluated. This in turn reduces risk to your company, and increases the amount of  confidence a surety provider will have while examining your application.

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Why you need to choose a local surety agency with proven expertise

Now that you understand the basics of performance and payment bonds, you can begin to see that there are a number of factors that go into determining if a project is risky or rewarding, and if bidding on a contract will set all parties up for success. 

By choosing a local surety agency over an insurance agent who might not specialize in surety, you’re actually getting more than just a bond–you’re getting a partner who advocates for your success. An experienced and trusted California surety agency like CSBA takes the time to understand the inner workings of your business and help you pursue projects that put you on a growth trajectory.

Our relationship approach to the surety bond process is what truly sets us apart from the competition. We’re the facilitators of communication between you, the surety provider and your project partners. We help all parties understand your expertise, and why it makes sense for you to pursue the project. 

We understand that navigating the bonding process can be overwhelming for new business owners, which is why we take the time to listen to your goals, understand the intricacies of your business, and craft a bonding strategy that helps you reach the next level. 

Whether you’re in the early stages of needing a bid bond, or just have questions about how a surety agency can help you prepare for your next bid, contact us today. We’re ready to help you succeed.