Sep 21, 2023
In the construction trade, there are various types of bonds. We’ll talk about the 3 most common bonds.
Performance Bond: This is a bond posted by the general contractor for assurances by the property owner that the general contract is completed on time and on budget. Performance bonds are more common on public construction projects but may also be available on private construction projects. The property owner is the primary beneficiary of a performance bond.
Payment Bond: This is a bond posted primarily by the general contractor primarily on public construction projects but may also be available on private construction projects as well. Payment bonds are required on public construction projects because mechanic’s liens cannot be filed on publicly owned pieces of property, and the payment bond is the payment remedy source and the source of collateral to support the credit line for downstream subcontractors, material suppliers, and service providers. Subcontractors, material suppliers, and service providers selling to subcontractors have the right to claim against the payment bond in the event of non-payment as long as they adhere to the statutory requirements. Occasionally, a subcontractor may post a payment bond as well. NACM’s Secured Transaction Services produces the Lien Navigator tool that breaks down the payment bond claim statutory requirements at the state and federal level. If you’d like more information about this tool, please contact Chris Ring at chrisr@nacm.org or (410) 302-0767.
Contractors license bond: Based on the state or local laws, contractors may be required to post a bond to obtain and keep their contractor’s license. When a material supplier or service provider selling to a sub or general contractor is not paid, they may have the right to put in a claim against the contractor’s license bond. This action is not available in all states or local governments.