United States
Hong KongBid, performance and payment bonds
A bid bond guarantees the bidder will enter the contract if awarded. A performance bond guarantees completion. A payment bond guarantees payment to subcontractors and suppliers.
Three bonds, and questions almost always ask which one covers a described situation.
The three
| Bond | Guarantees | Protects |
|---|---|---|
| Bid bond | The bidder will enter the contract if awarded | The owner, against a bidder walking away |
| Performance bond | The work will be completed | The owner, against contractor failure |
| Payment bond | Subcontractors and suppliers are paid | Subcontractors and suppliers |
Note who each protects. The payment bond is the only one whose beneficiaries are not the owner, and that is what questions test.
The three parties
A surety bond involves three: the principal, who is the contractor; the obligee, who is the party protected; and the surety, who issues the bond.
A bond is not insurance. If the surety pays out, it seeks recovery from the contractor. Insurance transfers risk; a bond guarantees performance and leaves the risk where it was.
Candidates treat a bond as a form of insurance protecting the contractor. It protects the owner or the subcontractors, and the contractor indemnifies the surety. It is closer to a guarantee than a policy.
Public work
Performance and payment bonds are commonly required on public projects, often at 100 percent of the contract value.
The reason is that mechanics liens generally cannot attach to public property, so the payment bond replaces the lien as the subcontractor's protection.
Getting bonded
Sureties look at capital, capacity and character. Financial statements, work history and the size of the job relative to what you have done before.
A bonding relationship takes time to build and is worth starting before you need it.
Common questions
What is a bid bond?
A guarantee that the bidder will enter the contract if awarded it, protecting the owner.
What does a payment bond cover?
Payment to subcontractors and suppliers. It is the only one of the three whose beneficiaries are not the owner.
Is a bond insurance?
No. A surety that pays out seeks recovery from the contractor, so the risk stays with the contractor.
Why are bonds required on public work?
Mechanics liens generally cannot attach to public property, so the payment bond replaces the lien as protection.
What do sureties look at?
Capital, capacity and character - financial statements, work history and job size relative to experience.