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Performance and payment bonds are two types of contract bonds that are often utilized in different types of construction projects. While the two bonds do share some common characteristics, they provide very specific types of protections during and after the project. Essentially, the performance bond is focused on how well the contractor carries out the provisions found in the contract with the client, while the payment bond helps to ensure that the costs associated with materials and labor is covered.
In order to understand the differences between performance and payment bonds, it is important to define what each bond type actually accomplishes. The payment bond tends to protect those who are engaged by the contractor to work on a specific project. This includes the vendors who supply the materials used in the project, as well as subcontractors who are tasked with overseeing specific aspects of the construction, such as the wiring or the plumbing. Even the laborers who are hired to work on the project are also covered by the provisions of the payment bond; if the contractor should default on his or her commitments, these professionals are still compensated for their efforts and contributions.
The focus of the performance and payment bonds also differ in that the performance bond focuses on the level of efficiency provided by the contractor. In the event that the contractor fails to live up to the terms of the contract, either by failing to complete the project or by failing to observe local building codes and regulations, the terms of the performance bond provide the resources to finish the project and/or bring the construction into compliance with local codes. This helps to protect the customer from being left with a building that is not fit for use and losing any investment made in the project up to that point in time.
In some areas, performance and payment bonds are not written separately, but as a combined bond issue that includes provisions to address each of the specific types of protection normally offered by the two bonds. Whether the performance and payment bonds are prepared separately or as a combined bond issue, the intent is the same: protect customers from losses sustained due to default on the part of the contractor while also protecting subcontractors, suppliers and even day laborers from losing money as the result of their relationship with the contractor. Typically, the bonds will remain in effect until the project is completed, an inspection by local authorities confirms that the work is in compliance with local codes, and all parties connected with the project have been compensated for their contributions.
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