Performance bonds vs. payment bonds for Texas contractors

Two bonds, different obligations

A performance bond addresses performance of a bonded contract. A payment bond addresses payment to eligible subcontractors and suppliers. Neither is a substitute for your general liability, commercial auto or workers’ compensation program. Liberty Union Insurance Group, Inc. helps contractors organize a bond request alongside their insurance needs.

Understand the three parties

The contractor is the principal, the project owner or other protected party is the obligee, and the surety provides the bond. Read the required form with the underlying contract. The bond’s conditions determine when obligations arise and what response is available.

Surety is not a way to transfer an underpriced project’s business loss without consequences. Indemnity obligations may require the contractor and other indemnitors to reimburse the surety for covered payments and expenses. Understand those commitments before signing.

Get ready before the bid date

• Provide the invitation to bid, contract and exact bond forms.
• Identify project value, location, owner, scope and completion schedule.
• Prepare financial statements and a current work-in-progress schedule.
• Explain similar completed work, key people and subcontractor plans.
• State the bid deadline and when final bonds will be required.

Keep claim and notice requirements separate

A subcontractor’s claim for unpaid labor is not the same as the owner’s allegation that a contractor failed to complete the job. Claimant eligibility, notices, deadlines and remedies depend on the bond and governing law. Get legal advice promptly if a dispute arises.

See the illustrative performance and payment bond example for a project that stops before completion.

Sources and further reading

• SBA: surety bond types and guarantees