Construction Payment and Performance Bonds – What Are They and What’s the Difference Between Them?
Two of the most common types of Bonds are Construction Payment Bonds and Performance Bonds. They share some similarities, but they also have many differences.
This blog will discuss the differences between the two Bond types and when each is the best option for your construction project.
What Are Construction Payment Bonds?
A construction payment bond is a type of surety bond that guarantees a contractor will pay its employer for materials or costs incurred on a project in advance. It protects these parties by providing financial assurance in case the principal contractor becomes insolvent or is otherwise unable to make payments, ensuring the project continues without disruption from unpaid contractors.
What Are Performance Bonds?
Performance Bonds ensure the satisfactory completion of obligations specified in the agreement, acting as a guarantee that a project or job will be completed as per the terms and conditions outlined in the contract.
Performance Bonds offer protection to the project owner or obligee, typically by providing financial compensation in case the contractor or principal fails to meet their contractual obligations; this is often due to bankruptcy or insolvency of the contractor.
To apply for a Performance Bond, our client account team will request and require the following information:
- Completed & Signed Application Form
- Most Recent Audited Financial Accounts
- Latest Management Accounts (if available)
- Copy of Performance Bond Wording (if available)
Complete our new easy-to-fill-out online bond application form here.
What Are the Differences Between Construction Payment and Performance Bonds?
The main difference between Construction Payment Bonds and Performance Bonds is that Construction Payment Bonds ensure employers are paid for their services and materials, protecting them against non-payment, whereas a Performance Bond offers protection to the project owner or obligee
Other differences between the two Bond types include:
- Terms under which the Bond can be claimed upon – Performance Bonds can be claimed against if the contractor goes insolvent or doesn’t complete the work, whereas, a Construction Payment Bond can be claimed against the contractor if the employer has not been reimbursed.
- What the Bonds cover – Construction Payment Bonds cover the cost of labour and materials on a project, and Performance Bonds cover damages or incomplete work of a project.
- Expiration and completion conditions – Performance Bonds stay in place until the bond cancellation is achieved, or when the longstop date has been reached. Construction Payment Bonds stay in place until the employer has been paid in full.
Similarities Between Construction Payment and Performance Bonds
Protect the Employer/Obligee: Both provide financial protection to the employer if the contractor fails to meet certain obligations.
Conditional Payment/Compensation: Both bonds allow the employer to claim reimbursement. Performance Bonds for non-performance, and Construction Payment Bonds for misuse or non-repayment of advance funds.
Facilitate Project Confidence: Both bonds give the employer confidence in the contractor’s reliability and help mitigate financial risk associated with the project.
Type of Surety Bond: Both are surety bonds, meaning a third-party surety guarantees the contractor’s obligations to the employer.
Performance Bonds and More From CG Bonds
CG Bonds is a specialist Performance Bond provider in the UK. Our dedicated client account managers will provide their technical expertise, ensuring a seamless experience when obtaining your bond. Contact us today to get a quote for your Performance Bonds.
