Bid Bond vs. Performance Bond vs. Payment Bond
Where Does Each Bond Fit Into the Project?
One way to understand these bonds is to look at the construction process from bidding through completion.
Bid Bond
A bid bond may be required when submitting a bid and generally supports the contractor’s obligation to honor the bid and enter into the contract if awarded, subject to the bond terms.
Performance Bond
A performance bond generally supports the contractor’s performance of the bonded construction contract according to the bond and contract terms.
Payment Bond
A payment bond generally addresses qualifying payment obligations for certain labor, subcontractors, and suppliers associated with the bonded project, subject to applicable bond terms and law.
A Construction Bond Is a Three-Party Agreement
Surety bonds operate differently from traditional liability insurance. They generally involve the contractor, the party requiring the bond, and the surety company issuing it.
The Contractor
The principal is generally the contractor whose obligation is being bonded.
The Party Requiring the Bond
The obligee may be a project owner, government agency, general contractor, or another party requiring the bond.
The Bond Company
The surety evaluates the contractor and issues the bond supporting the specified obligation.
The Required Penal Sum
The required bond amount may be based on the bid amount, contract amount, or another amount specified by the project requirements.
What Should Contractors Review Before Requesting a Bond?
Bonding requirements can vary significantly by project. Review the bid package and contract carefully so the requested bond matches the actual obligation.
Bond Type
Confirm whether the project requires a bid bond, performance bond, payment bond, or a combination of bonds.
Required Amount
Determine the percentage or dollar amount required and whether later performance and payment bonds must equal the contract amount.
Bond Form
Some project owners require a specific bond form, wording, obligee name, or execution format.
Contractor Capacity
The surety may review financial strength, experience, work history, current backlog, project size, and other underwriting information.
Does Your Project Require a Construction Bond?
Best Formula Insurance can help contractors review bid bond, performance bond, payment bond, and other commercial bond requirements based on the project and available surety options.