Bid, performance and Payment Bond: which one fits better our goals?
Three types of primary bonds are usually purchased on construction projects: bid bonds, performance bonds and payment bonds that differ mainly for the aim of requestor.
Bid Bond: if this is tha case, we can imagine a public entity, YXZ, putting a Request for Proposals for a new parking area on their building. Contractors 1, 2 and 3 submit bids to perform the work listed in the Request (RfP). The public entity requires each of the contractors to submit a bid bond with their bid. The bid bonds are purchased by the three contractors from sucurities. The public entity decides to accept Contractor Y’s bid. Contractor Y determines that they have underbid the project and decides not to execute the contract and not to perform the work. In this instance, the public entity can make a claim against the bid bond due to Contractor Y’s failure to abide by its bid. Thus, a bid bond is a type of bond (often required on publc construction projects, but not exclusively) designed to protect the owner in the event that the bidder refuses to enter into a contract after the contract is awarded or the bidder withdraws his bid before the award. A bid bond is an indemnity bond, which will be discussed below.
Performance Bond: a Public Company retains Contractor A to construct a park in downtown. Contractor AB enters into a written contract and begins performing the work. During the performance of the work, Contractor A goes out of business leaving the work about 50% finished. Additionally, some of the work that was performed was defective. Contractor A has provided Public Company with a performance bond. The Public Company can assert a claim against Contractor A’s performance bond for the cost to perform the unfinished work and the cost to correct the defective work. Thus, a performance bond protects the owner from the contractor’s failure to perform in accordance with the terms of the contract. A performance bond does not provide protection against subcontractor or suppliers who have not been paid. A performance bond is also an indemnity bond.
Payment Bond: Public Company has retained Contractor 1 to install a new water tower. Because the project was over a certain amount of money, Contractor 1 was required by the Public Company to provide a payment bond. Contractor 1 completed the work, but failed to pay Subcontractor X for its work. Subcontractor X cannot pursue any claim against the Public Company. However, Subcontractor X can assert a claim against the payment bond for the amount owed to it for its work on the project. Thus, a payment bond is designed to provide security to subcontractors and materials suppliers to ensure payment for their work, labor and/or materials on the project. A payment bond is also an indemnity bond.
Indemnity Bonds: As set forth above, bid bonds, performance bonds and payment bonds are indemnity bonds. These bonds are not insurance policies. If a covered claim arises against a commmercial general liability policy, the insurer has a contractual obligation to indemnify and defend the insured (i.e. the party obtaining the policy) and cannot seek repayment from the insured for amounts paid out as a result of a covered claim. If a claim arises and is paid out on a bid bond, performance bond or payment bond, the surety (the party issuing the bond) will look to the contractor to indemnify and defend it. So, if a claim is asserted against Contractors’ performance bond, the surety is going to look to Contractors to defend the lawsuit and to pay any damages.