A performance bond is a surety bond from an insurance company or bank (typically coupled with a payment bond) that guarantees to a project owner from the contractor that the project will be completed satisfactorily. It is common to see performance bonds on Government projects to protect the taxpayer’s investment. If the contractor defaults on the project the project owner will make a claim on the performance bond triggering the surety bonding company to pay for project completion. Performance and Payment bonds are now a requirement on Federal Projects and many states have adopted this policy as well.
Payment bonds protect laborers, material suppliers, and subcontractors against non-payment and protect the owner from mechanics lien’s on their property. Payment bonds are typically purchased with Performance Bonds and are purchased by the contractor or subcontractor, included in their bid price, and furnished to the owner upon award of the contract. If someone is not paid on a payment bonded project, that material supplier or subcontractor makes a claim on the bond and if legitimate, the bonding company pays the claim and holds the contractor responsible for the cost.