Payment Bonds and Performance Bonds for Construction Projects

The legal landscape of the construction industry can be complex. Construction Dive has a series of articles called “The Dotted Line” series that can serve as a great resource for contractors. A recent article looked at payment bonds and performance bonds for construction projects. These are required for most public agencies and by some private owners. It’s important to understand what payment bonds and performance bonds are, how they work together and how they are different from one another.

Payment bonds and performance bonds are often issued together; however, they are two distinct documents. A performance bond guarantees that a principal will fulfill their contractual obligations under a project. A payment bond guarantees that a contractor or subcontractor will pay all subcontractors, suppliers or laborers for work and materials provided under a project. Both bonds help to protect the project owner (whether it be a public or private entity) to make sure that the work gets performed and also guarantees that payments be made according to federal and state laws and regulations.

The Miller Act is a Federal law that is designed to protect businesses on construction projects. It requires that “contractors for the construction, alteration, or repair of Federal buildings furnish a payment bond for contracts in excess of $100,000.” Additionally, “other payment protections may be provided for contracts between $30,000 and $100,000.”

States might also have their own requirements, known as “Little Miller Act” laws. New York’s Little Miller Act is provided through State Finance Law Section 137. It requires the contractor to carry appropriate payment and performance bonds for any contract of at least $100,000 dollars. If you fail to complete the agreed-upon work as a contractor, anyone can file a bond claim as a lien against your company (anyone meaning the entity providing the contract, subcontractors or materials services providers). This requires the contractor to pay them back for any financial damages suffered from a failure to complete the project.

Remember that surety bonds are not insurance, even if you go to a general insurance agency like Rose & Kiernan, Inc. to secure payment bonds and performance bonds for construction projects. We go into more detail on the differences between business insurance and surety bonds in a previous blog post. For more information on surety and how R&K’s expertise will help to meet all of your domestic and international bonding needs, please see the Surety section of our website.

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