Guest Blog – Public Contracting: Why You Need Performance and Payment Bonds

Image Credit: Anders Adermark, flickr

“Most of the time, when a public project goes well, no one notices. Few taxpayers will think anything of uninterrupted miles of working power lines, or an extremely competent drainage system.

However, when a public works project goes over budget, it can mean thousands of angry constituents and big sums of money to answer for. In the extreme worst cases, a well-intentioned infrastructure project can become a wildly over-budget public controversy (like Boston’s Big Dig), or a politically radioactive debacle that’s talked about nationwide (like Alaska’s infamous “Bridge to Nowhere“).

The world of public contracting is quite complex because at stake are a lot of taxpayer dollars, with figures sometimes in the billions. In order to compete for these jobs, contractors will have to take out contract surety bonds. Two types of contract bonds which you’ll need for this work are performance and payment bonds. Here’s a quick introduction to what they are, and how they differ.

Contract Bonds

When a government on the federal, state, or municipal level needs to build a civilian project, it will hire an outside agency. Once the agency has been chosen, they receive what’s called a public contract for that job, which is legally defined as an agreement to construct or repair a structure or road with public money. In order to increase accountability, public contracts are legally enforceable.

Due to the stakes involved, public agencies that award contracts require a bond before a job begins. As with other bonds, these bonds exist to protect the public from malfeasance, or in case the bonded party can’t fulfill their obligations. Typically, public jobs require both performance and payment bonds that go together for a single job. They are referred to often when discussing construction, but they are two separate bonds that cover different things:

1. Performance Bonds

While the payment bond makes sure that workers get paid, the job still needs to get done. A performance bond is taken out to guarantee that the contractor will complete the job as laid out in the contract. If the contractor doesn’t finish the projects as agreed in the contract or walks out of the project before it is finished, a claim can be filed against them. The bond is required by the Miller Act, passed in 1935, as the federal government was looking for ways to improve the quality of the work done on public projects.

2. Payment Bonds

There is a lot that goes into a construction job, and a payment bond covers, naturally, payment. A payment bond ensures that everyone gets paid the wage to which they’re entitled. A payment bond is taken out for the full amount to guarantee that the contractor will pay their employees and subcontractors. The good news is that the price of the performance and payment bond can be listed as part of your proposal, so in effect, you won’t pay for them.

Though the world of contract bonds can be complex, the lucrative nature of public contracts makes this work an attractive option. In addition to the income itself, Those working on public contracts can also know that they are working to improve communities. Have you found success in the world of public contracting? Let us know in the comments below.”

Written by Lorenzo Estébanez

Lorenzo Estébanez writes about surety bonds, with a focus on the process of obtaining bonds and getting licensed. He is a regular contributor for the Bryant Surety Bonds blog.

About the Author: Seth Smiley
Seth is an attorney licensed to practice in Louisiana and California. He is the owner and lead attorney at Smiley Law Firm. To speak with Seth fill out the form on this page. Follow Seth on LinkedIn, Google+, or Twitter.

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