Bid vs Payment vs Performance Bonds
First, it’s important to note the difference between bid vs. payment vs. performance bonds. These are the “big three” construction bonds required on every public construction project over $100,000 and often purchased together:
- Bid Bond: Assures a project owner that a contractor has the proper credentials and intention to accept a job
- Payment Bond: Ensures payment for subcontractors and materials suppliers
- Performance Bond: Guarantees project completion per the agreed-upon contract
These bonds work together to ensure completion of construction projects and create financial guarantees for all parties involved. See the table below for a quick overview of the differences between payment vs. performance vs. bid bonds.
| Bond Type | Bid | Payment | Performance |
|---|---|---|---|
Bond Purpose | Ensures a contractor is able to fulfill their bid | Protects subcontractors and suppliers | Protects the project owner |
Contractor’s Obligation | Honor and carry out the bid if awarded | Pay their subcontractors and suppliers | Complete the job to contract standards |
These bonds each serve a different purpose to guarantee a project will be completed according to contract. Keep reading to understand how each of these three bonds come into play throughout the construction bonding process.
#1 Secure the Project with a Bid Bond
A bid bond is typically the first stop in the construction bond process. As you know, this assures the project owner that you can and will follow through with the job. You’ll need this bond during the bidding stage. Get your bid bond for no cost today!
#2 Solidify the Contract With Payment and Performance Bonds
Once you win a contract, negotiations begin to determine the project duration and specifics as well as subcontractor and supply needs. When this is finalized, you’ll need to purchase payment and performance bonds to cover the total value of the project.
Payment and performance bonds are typically issued together to hold you accountable to completing the contract as promised and paying all subcontractors and suppliers on the job.
Bond premiums typically cost around 3% of the total bid value and act as a line of credit for any claims made. Learn more about how payment vs performance bonds work here.
#3 Provide Warranty With a Maintenance Bond
Your contract should stipulate whether or not obtaining a maintenance bond is your next step. A maintenance bond ensures that you will remedy any defects after a project is complete, similar to a warranty.
You’ll typically get a maintenance bond after completing a project. The cost depends on the agreed timeframe for repairs:
- 0-1 year term: 3% of the project amount
- 2 year term: 3.25% of the project amount
We do not currently provide maintenance bonds with longer terms. However, other providers may offer extended-term maintenance bonds for additional premium.
Working on a development project?
For certain public infrastructure projects, you’ll need more than the “big three” bonds. Development bonds are often required to make sure that construction adheres to local government regulations. There are two main site development bond types:
Subdivision Bond
- Subdivision bonds ensure any type of new construction on a subdivision plat is completed according to local municipal guidelines. This covers anything from streets and curbs to gutters and drainage ditches.
Site Improvement Bond
- Site improvement bonds ensure the completion of improvements made to existing public properties or structures.
Both bond types need to be filed (if required) before you complete a project.
Working on public property?
Construction projects that take place on or near a right-of-way may have additional bond requirements. A public right-of-way includes areas such as sidewalks, public parking lots, power line systems, sewage or water pipes, etc.
Right-of-Way Bond
- These bonds guarantee that projects involving a public right-of-way will meet local ordinances.
Encroachment Bond
- Projects on private property adjacent to public land may require an encroachment bond prior to the start of construction.
Either the project owner or the contractor must file these bonds to guarantee they will not disrupt public property during or after construction.
How Are Claims Handled for Construction Bonds?
Claims on construction bonds follow the same process as any other surety bond. The issuing surety company will follow this general process to settle claims:
- Investigate Claim: The surety will investigate the claim and review supporting documentation and evidence.
- Notify Principal: If the claim is valid, the surety will notify the principal (typically the contractor) to resolve the claim. They’ll also inform the obligee.
- Seek Payment: If the principal does not resolve the claim, the surety will pay the claimant and seek reimbursement from the principal.
It’s very important to avoid bond claims if at all possible. Surety underwriters are less likely to approve bonds for contractors with a history of claims.
Who’s Responsible for Construction Bond Claims?
In most construction bonds, you, as the contractor, are responsible for purchasing the bond and paying any claims. However, some right-of-way bonds, for example, list the project owner as the principal. In this case, the government agency or private investor funding the project is responsible for claims.
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