The Difference between Payment and Performance Bonds

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Payment and Performance Bonds are the two types of Construction bonds often confused with each other. To get the basics right, one should know the basic difference between the two types of bonds.

A Performance Bond is a form of guarantee by the Surety Company, that a project will be completed according to the specifications mentioned in the contract. If the Principal fails to do so then it becomes the responsibility of the Surety Company to complete the project or have it completed.

The payment bond is a guarantee all the sub-contractors, workers, and laborers working on the project will be paid by the Principal.

These two bonds work in tandem to ensure a project is completed lien free. In many cases, both types of Bonds are required for construction projects. Sometimes, in rare cases, a payment bond may be required without the need of buying a performance bond. Bonding Companies generally offer Performance and Payment Bonds together so clients might pay one price for both types of bonds.

When applying, financial statements including balance sheets, income statements, cash flow statements, and a work in progress schedule with full disclosure are all required to complete the process.