Payment Bond, Performance Bond, and Bid Bond

It is possible for one writing to be both a payment and performance bond. It all depends on the wording of the document.[2]

Payment Bond – Example payment bond.pdf

In a payment bond, the surety provides security that all persons supplying labor and material to the project will be paid. Subcontractors and suppliers are the “beneficiaries” of a payment bond. They do not require the bond. They are not parties to the bond but are third-party beneficiaries. However, the payment bond ensures that subcontractors and suppliers will be paid so that the obligee does not have risk of claims or mechanic’s liens if the principal fails to pay. If the principal defaults, beneficiary subcontractors and suppliers usually have the right to sue the surety directly for payment.

Performance Bond – Example Performance Bond.pdf 

In a performance bond, the surety provides security that the principal will perform all of its contract obligations in a timely and workmanlike manner.

Usually, a performance bond is only for the benefit of the obligee/owner of the construction project. If the principal defaults, the obligee/owner can require the surety to complete the project or to pay for the costs of completion. Subcontractors usually do not have the right to seek payment from the performance bond surety if the principal defaults.

A general contractor can require a subcontractor to obtain a performance bond as security that the subcontract will be completed in a timely and workmanlike manner. In this case, only the obligee/general contractor can require the surety to complete the subcontract work or to pay for the costs of completing the subcontract work.

Bid Bond – Example Bid Bond.pdf

A bid bond provides security to the obligee/owner that if a contract bid is awarded to the principal, the obligee/owner will obtain a contract with the principal to have the work completed at that bid price. If the principal fails or refuses to enter into a contract for the bid price or to provide any required performance and payment bonds, the surety will be responsible for any costs incurred in rebidding the project and any increased contract costs. An owner can require bid bonds from all general contractors bidding on a project. A general contractor can also require bid bonds from all subcontractors bidding to the obligee/general contractor.

[2] Phoenix Ins. Co. v. Lester Bros., Inc., 203 Va. 802, 127 S.E.2d 432 (1962); Mayor of Baltimore v. Fidelity & Deposit Co., 282 Md. 431, 386 A.2d 749 (1978).

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