Performance Payment Bond Information
It is customary to issue a performance payment bond together, as they are usually complementary. Performance bonds guarantee that the the project and the other in relation to other parties involved, such as subcontractors. Furthermore, all publicly funded projects are bound by the Miller Act to have both performance and payment bond in place on contracts that exceed $150,000. According to the Miller Act, the sides who have a right to a claim on a payment bond are:
- all first-tier subcontractors, suppliers and laborers to the general contractor, and
- all second-tier subcontractors, suppliers and laborers who have a direct contract with a first-tier subcontractor.
Payment Bond Definition: Typically required in conjunction with performance bonds, payment bonds are contract bonds that guarantee subcontractors and material suppliers will be paid. The parties that make up the payment bond agreement are the principal (contractor), the obligee (the project owner) and the surety bond company providing the bond. While the sides receiving compensation in the case of a payment bond claim are subcontractors, suppliers and laborers, it is the project owner who is the obligee, because they are the ones who need protection against claims by those parties in the case of contractor default. If, for some reason, a contractor doesn’t pay those parties within a reasonable timeframe, a claim can be made against the bond. The surety who issued the bond then steps in and takes care of all pending financial obligations of a contractor towards those parties. Payment bonds are usually submitted to obligees alongside performance bonds, which is why it is common to refer to them together as a ‘performance and payment bond’.
