Why do Public Construction Projects need Bid, Performance and Payment Bonds?

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Public construction work in America is chiefly undertaken by private sector firms. The lowest responsive bidder acquires this work through the open competitive sealed bid system. This system works well with the help of surety bonds.

The Bid Bond is intended to keep careless bidders out of the bidding process by assuring a promising and concerned bidder will enter into the contract and provide the required performance and payment bonds. If the lowest bidder fails to maintain these commitments, the owner is protected, up to the amount of the bid bond, usually for the difference between the low bid and the next higher responsive bid.

The Performance Bond secures the contractor’s promise to perform the contract in accordance with its terms and conditions, at the agreed upon price, and within the time allowed.

The Payment Bond protects certain laborers, material suppliers and subcontractors against non-payment. The payment bond (or the construction bond) may be the only protection these claimants have if they are not paid for the goods and services they provide to the project.

Bonds: Many Benefits

  • Project owners trust those contractors more who have a performance bond.
  • Trust is built on both sides because performance bonds assure the contractor fulfills the conditions of the contract.
  • Payment bonds promise protection to laborers, material-suppliers and sub-contractors against non-payment.

Why do Construction Contracts need Advance Payment Bonds?

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Down payment, or an advance payment, bond is the bond required to secure the payment against default by the contractor if the client agrees to make an advance payment to a supplier.

In most of the cases on a construction project, an advanced payment guarantee will be required by the client if the contractor requests advance payment to help them meet significant start up or procurement costs that may have to be incurred before construction begins.

An advance payment bond is normally an on-demand bond, which makes it mandatory for the bondsman to pay the amount of money set out in the bond immediately on demand, without any preconditions having to be met. This is as opposed to a conditional bond (or default bond) where the bondsman is only liable if it has been established there has been a breach of contract.

Advance payment bonds must be very carefully drafted to set out the circumstances for payment and to make clear they are on-demand bonds.

Advantages of advance payment bond:

  • Additional liquidity is received to finance activities/orders.
  • The buyer is secure with a guarantee his advance payment will be returned if the contract isn’t fulfilled