Performance and Payment Bonds Overview
Performance Bonds, also referred to as Contract Bonds, are a common form of Surety Bonds. These bonds are generally issued by insurance companies or banks to help guarantee a contractor takes a contracted job from start to finish per all the contractual guidelines. When a Performance Bond is purchased by a contractor who just won a bid, they usually purchase a Payment Bond, as well. Together, the Performance and Payment Bonds are the most common Construction Bonds in the industry.
Cordova Insurance offers these bonds and understands the need to insure your construction company’s promise to complete a job, pay its subcontractors, material suppliers, laborers, and other vendors.
How Do Performance and Payment Bonds Work?
Generally, it is the contractor’s job to get the bond and pay for the bond. However, it is also a common practice to include the Performance Bond costs inside the project bid, migrating the bond costs back over to the client (project owner).
Next, the contractor generally purchases a Payment Bond to pair with the Performance Bond. The Payment Bond makes a guarantee a contractor will pay other vendors involved in the project, such as the following:
- Material Suppliers
- And More
The Payment Bond creates a three-way contractual agreement between the project owner, the contractor, and the surety (the underwriter issuing the bonds). Although Payment Bonds can be purchased without a Performance Bond, it is rare.
As for the Performance Bond, if a contractor either does not or cannot complete a job, the bond helps make good on its financial obligations to the project owner. We work with contractors on a regular basis. We understand that life happens, and any one or combination of the following can cause you to default on your promise to the client. Items such as the following:
- You became ill
- You were injured on another job site
- You took on too much work
- You had a significant family emergency
- You had business financial issues
- A global pandemic
Sometimes the weather can even make it difficult to complete a construction project. Sometimes the deadline was close to impossible to meet on day one.
Either way, without Performance and Payment Bonds in place on day one, your construction company could find itself on the wrong end of a lawsuit, which could end up bankrupting your company.
Why Performance and Payment Bonds Are Important
The construction business operates through private and public contracts. Private contracts allow contractors to work on private buildings, developments, houses, and other private entities.
Public contracts involve projects receiving government funding, such as public hospitals, roadways, schools, and other public entities.
Before Performance and Payment Bonds were created, it was common for many contractors to leave a job incomplete for whatever reason. As a result, many customers were left with a large debt and an unfinished project.
As a result, many public projects now require bonds from contractors. Most public construction contracts even require a contractor to pre-qualify with a Bid Bond. A Bid Bond is submitted with your initial bid. It shows the project owner you are guaranteed for the bid amount and are set to purchase a Performance Bond if you win the bid.
If the project were left incomplete and vendors unpaid for any reason, the bonds would kick in and pay the project owner so they could hire someone else to finish the job.
Most public projects require bonding by law these days. However, private projects typically do not require bonds. For your company’s safety, it is always a good idea to obtain a bond for any construction project.
Performance and Payment Bonds Coverage
Performance and Payment Bonds can help cover the financial loss for all parties involved when vendors go unpaid, and projects go unfinished.
However, many construction companies round out their Construction Insurance portfolios with other common insurance coverages such as the following:
- General Liability: General Liability Coverage helps cover the loss due to general issues occurring during construction. For instance, if a property is damaged or a person not working on the project is injured, general liability may help cover the related repair and medical expenses.
- Commercial Property: Commercial Property Coverage covers your businesses building and much of their contents. It may help protect your costly construction equipment in the event it is broken or stolen. Construction equipment, including work trucks, drills, excavators, and other tools used for general projects, can be costly. Commercial Property Insurance can help mitigate the costs to replace these necessary tools to continue your project.
- Commercial Auto: Construction vehicles require drivers. Commercial Auto Coverage helps cover the cost of damage to the vehicle and the driver or others injured in the event of an accident.
- Workers Compensation: Construction projects can be extremely dangerous. One wrong move can lead to irreparable harm to any contractor. Workers Compensation Coverage helps cover the medical expenses and lost wages resulting from an injury occurring on the job.
- Inland Marine: Covers products, materials, and equipment while the items are being transported via land, such as by work truck or train. Inland Marine Coverage was designed to help protect company property that is movable.
- Commercial Umbrella Insurance: Provides additional liability protection if costs due to an accident reach past what your Business Liability Policy is able to cover. Commercial Umbrella works with your Business Liability to add more coverage, which increases your total liability amount.
Contract Bonds are only a part of the recommended coverage construction entities should maintain. Cordova Insurance Agency’s Commercial Insurance Policies can protect a company from many issues that may temporarily or permanently cease operations. Whether your construction firm requires additional insurance coverages or bonds to help continue operations, we can help!
Some additional coverages may include, but are not limited to:
- Employment Practices Liability Insurance (EPLI): EPLI coverage can help cover your construction business in the event of an employment discrimination lawsuit. If an employee sues you and your company for wrongful termination, sexual harassment, retaliation, or any other employment issue, EPLI can help pay the associated settlement and attorney fees.
- Pollution Liability: Helps cover costs relating to pollution your business may cause on the job site.
- Crime Insurance: Crime Insurance can help construction businesses who may fall victim to financial fraud and theft. The policy helps the company recover and resume work as normal.
- Business Income Insurance: If your business must cease operations due to a covered event, such as fire, flood, hurricane, theft, or more, Business Income Insurance may help you recover financially to get the business back up and operating.
Areas We Serve
Construction is an ever-growing business. Even in the worst of times, cities and towns must continue to grow. Whether the projects help erect new buildings, rebuild, or repair an existing building, fix roadways, and more, the industry will be forever in business.
Cordova Insurance Agency helps these businesses get the coverage they need. We are proud to maintain our headquarters in central Wisconsin in Merrill. Our clients are throughout central Wisconsin, including Merrill, Wausau, Tomahawk, Minocqua, Woodruff, and surrounding areas.
The law requires contractors to obtain Performance Bonds for public construction contracts. Construction firms must protect their companies with the proper bonding and insurance coverage.
Cordova Insurance Agency can help your construction company obtain the proper bonding and insurance coverage needed to protect your assets.
To learn more about Performance and Payment Bonds, contact Cordova Insurance Agency at (715) 536-9576. Our licensed professionals will be happy to answer any questions you have.