When working on a public project, and especially a large scale commercial jobs there’s most likely a surety bond on the project. There are two kinds of bonds a performance and payment bond. Performance bonds provide assurances for the private developer or public entity, that owns the project that the general contractor will complete the contract on time. If the subcontractors and the material suppliers don’t get paid, they can file a claim against the payment. While you can’t file a mechanics lien on a public project, you can file a bond claim and in many states a lien on public funds.
There are generally two types of relevant bonds: payment bonds and performance bonds. Performance bonds are used by the project owner to file a claim against the payment bond if needed.
Performance Bond Details
A performance bond is a surety that binds the general contractor and the governmental entity (which owns the project) to the project’s details and its timely completion. The performance bond ensures that the contractor performs as specified in the construction contract and, if they fail to do so, the project owner can submit a claim against the bond. In the end, the bond holder (often an arm of an insurance company that specializes in construction bonds) becomes responsible for seeing the project to completion or payout the value of the bond.
Requirements vary between federal, state, and local governments. In addition, they vary by project type, whether a bond is required, and its scope. This process adds another party into the mix, the surety company, who can pressure both sides towards completion. The surety company has a vested interest in ensuring the work is performed to specifications, and that the subcontractors and suppliers are paid on time.
How Performance Bonds Benefit Contractors
The cost of a performance bonds vary, but generally represent a fraction of the value of the contract. If a performance bond is required, it can generally and easily be obtained by working with a surety company. Once a company’s bid has been selected, that company obtains bonds. Generally, you obtain both a performance and a payment bond at the same time so that both sides of a particular transaction, as well as all subcontractors and suppliers involved, are protected in the event of a problem.
While the obvious benefits of performance bonds might be for the owner of the project, they also protect subcontractors and ensure work carries on regardless of any issues the general contractor may encounter. Knowing that a third party protects the work and keeps it on schedule ensures a cash flow to those further down the contracting line.
If you’d like to learn more about construction bonds, or you’re in need for specialized advice, reach out to the National Lien and Bond team. With dedicated expertise in the construction industry all over the USA, our team can quickly address and respond to your concerns. In addition, they offer the industry’s most highly informative lien seminars to ensure your entire management team is up-to-date about mechanics liens and construction bonds.
This blog is for educational purposes only and not intended for legal advice.