Understanding The Difference Between Performance And Payment Bonds

The construction business involves huge investments, particularly the ones involving government infrastructure such as roads and bridges. At the same time, such projects involve a great deal of risk related to the non-completion of projects. For this reason, contractors rely on bonds and guarantees to cover risks and assure the project owners regarding project completion. Performance bonds and payment bonds are the two most common types of bonds that the industry talks about.

Both of them are typically required as a part of a public sector project contract, though they may also be demanded in private projects. There is sometimes confusion between the two types of bonds as people generally consider them to be the same. But it is important to understand that these are not the same. This confusion can so lead to contractors not taking the bonds, which may result in problems for them. Let us know all about these bonds and also try to understand the difference between them.

All About Performance Bonds

Performance bonds refer to the contracts that guarantee the completion of projects on the behalf of the contractor (or subcontractor). The bond is issued by a surety company that takes the responsibility of project completion if the contractor fails to do it.  In such an event, the project owner (mostly government entities) can submit a claim against the performance bond. Public sector projects generally require the contractors to present a performance bond while bidding on a project. However, it is not mandatory for private projects though private project owner may still ask for it to reduce their risk.

All About Payment Bonds

Payment bonds, on the other hand, guarantee that a contractor (or subcontractor) will compensate their subcontractors, suppliers or laborers. In other words, they secure the wages or the payments for supplies in the event of the contract not being completed. The bond benefits these third parties in case the contractor shows inability to pay them. In such a situation, these parties can claim the payment against the payment bond. Like performance bonds, payment bonds are usually a part of public projects though some large-scale private projects may also have themselves covered.

Understanding The Difference

It is easy to distinguish between performance bonds and payment bonds. The key point that distinguishes the two relates to the party benefiting from it. While a performance bond covers the risk of the project owner, the payment bond does it for third parties. There is another thing to be considered for making a distinction between these two types of bonds. The performance bond ensures the work on the project is done and it is completes. On the other hand, the payment bond secures the payment for the work done (or supplies used) on the project.

Partnering with a professional bond provider such as swiftbonds.com is the best option for contractors looking to streamline their projects. They can explain the bonds and the difference between them. Also, they can guide the contractors about the right process of procuring these bonds.

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