Performance & Payment Bond (P&P) – Construction

Performance and Payment Bonds are two separate bonds that are often required for both public and private contracts. While they are separate bonds, they are often included together and may also be referred to as a P&P Bond. Learn more below, and apply today through our convenient online system.

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Performance Bond vs. Payment Bond

People often confuse these bonds as the same. Although both performance and payment bonds are often required for construction projects, they serve distinct purposes. Below, let’s learn more about performance and payment bonds, the cost and application process, and how they differ from insurance.

A performance bond is a surety bond that is issued by a bonding company or bank to guarantee satisfactory completion of a project by a contractor. It protects the owner in case the contractor fails to complete the contractual obligations. If the obligations are not met, the surety company will step in and pay the claim. Afterwards, the surety company will seek reimbursement from the contractor.

These bonds are used to safeguard the owner, contractor and the people associated with the project (i.e. the public). The government or corporate entities often require these bonds for any task where taxpayers’ investments need to be protected. In government projects, one submits an application for such projects as bridges and roads. More frequently, we are seeing private owners requiring performance and payment bonds as well. This protects the private owner from a contractor who may not be able to properly complete the work and also protects the owner from double payment (i.e. having to potentially pay subcontractors twice, due to a GC defaulting and not paying their subs).

Payment bonds are a guarantee that the contractor will pay all laborers, material suppliers, and contractors per contractual obligations.
P&P Bonds can have any face value, but they are usually issued in an amount covering 50 to 100% of the value of the construction contract, with 100% performance and payment bonds being the most frequent. If you need a performance and payment bond, the premium can range from around 0.5% of the contract value on the low end to 3% on the higher end. Larger contractors will typically have a competitive sliding scale rating structure. However, the cost can vary widely from company-to-company, depending on the financial capacity, company history and credit, among other items.
Surety bonds should not be confused with an insurance policy. What makes them different is that in an insurance policy, the insurer has to defend the insured as well as cover them. More importantly, they are not able to get repaid from the insured for the amount of any loss or any costs associated with the claim. In comparison, a claim on a bond ensures that the surety company evaluates the case of the claim and the contractor to make sure that there is a valid claim and, more importantly, the surety will ask the contractor to reimburse it for any claim damages and lawsuit fees, should the surety need to payout on the contractor's behalf.
Before approving a P&P Bond, the surety company ensures that they check the applicant’s character, history of contract performances, necessary equipment, financial strength, history of paying subcontractors and suppliers on time, bank relationships and an established line of credit. These are all factors that go into the underwriting process and affect the single/aggregate program considerations.

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To address all your concerns regarding bonds, Surety Bond Professionals is your solution. We offer a quick and easy process for obtaining bonds, with the least amount of hassle. Get your free quote through our convenient online application.

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