Performance and payment bonds

Performance and payment bonds, often shortened to P&P bonds, are two guarantees a contractor provides through a surety company once it is awarded a contract. They protect the owner, and the people working under the contractor, if the contractor fails.

The two bonds

• Performance bond: guarantees that the contractor will complete the work as the contract requires. If the contractor defaults, the surety steps in, for example by arranging for another contractor to finish or by paying the owner, up to the bond amount.
• Payment bond: guarantees that the contractor will pay its subcontractors, workers and suppliers. On public jobs, where a lien usually cannot be filed against the property, the payment bond is how unpaid subs and suppliers get paid.

Each bond has a penal sum, often equal to the contract amount, set by the contract. Like a bid bond, that sum is the most the surety could owe, not what the contractor pays.

When they are required

On federal construction contracts over $150,000, the Miller Act requires both bonds. Most states have similar laws, often called "Little Miller Acts," for state and local public work, with their own thresholds. On private work, the owner decides, and the requirement is written into the bid documents and the contract.

Read the instructions to bidders and the contract for which bonds are needed, their amounts and the form to use. A bid bond, if one is required, promises that you will provide these bonds if you are awarded the job.

What they cost

The contractor pays the surety a bond premium for the performance and payment bonds. The surety usually prices it on the contract value, on a sliding scale that steps down as the contract gets larger, with rates set from the contractor's financial statements, credit and record. Ask your surety or bonding agent for your schedule.

The premium is a job cost and belongs in the bid. The bonds' penal sums do not.

Bonds and the surety relationship

A surety bond is not insurance for the contractor. If the surety pays a claim, it expects the contractor to pay it back, usually under an indemnity agreement signed when the bonding relationship starts. The surety also sets a bonding capacity: how large a single job, and how much work in total, it will bond for you. Bidding work beyond that capacity means talking to your surety before bid day, not after.

In the bid

The "Bond" line in a bid summary is the premium on these bonds, added last because it is charged on the full contract amount. In IntelCost's estimating, the bid summary adds bond after tax, overhead, extra markups and profit, ending in the bid total. The guide on how to build a bid summary shows the premium worked through a full example.