Performance vs. Payment Bonds

Often public agencies invite bids for a public works project in which they only mention that the successful contractor will be required to post a Performance Bond, without also mentioning the requirement for a Payment Bond.

Are Both Bonds Required? These two types of bonds provide different types of protection for a public agency and both should be obtained. In fact, depending on state and local laws, there is often a requirement that contractors post both a Performance Bond and a Payment Bond. In Washington State, Performance and Payment Bond requirements are addressed in chapter 39.08 RCW.

Purpose of Performance Bond: With a Performance Bond, the bonding company or surety agrees that if the contractor fails to complete the work, the bonding company will step in and finance the work and ensure that it is completed according to the contract documents.

Purpose of Payment Bond: Under a Payment Bond, the bonding company agrees to pay any subcontractors, suppliers, or workers in the event there are valid claims filed against the bond.

One Bond or Two Bonds? Should a public agency obtain one bond covering both Performance and Payment provisions, or should two separate bonds be obtained? Obtaining two separate bonds, each in an amount equal to the full contract price, actually provides the public agency with additional protection. Essentially, the agency is then covered for 100% of the contract amount for performance related claims, and 100% of the contract amount for payment claims. This is in contrast to obtaining a combined Performance and Payment Bond, where coverage is limited to just 100% of the contract amount for both performance and payment related claims.

Checklist of questions to ask about your agency's practices:

1. What do your state and local laws require with respect to obtaining Performance and Payment Bonds?
   
   
2. Do your advertisement and bidding documents require both a Performance Bond and Payment Bond?
   
   
3. Do you obtain separate bonds for Performance and Payment to provide extra protection for your agency?