The three primary bonds that are purchased on construction projects are bid bonds, performance bonds and

payment bonds. Over the years, I have spoken to contractors and owners and, in many instances; there is confusion about what each bond covers. This brief article will attempt to explain thedifferences. Example1:BidBond ABC School District has put out a Request for Proposals for a new roof on their high school building. ContractorsX,YandZsubmitbidstoperformtheworklistedintheRFP.TheSchoolDistrictrequires each of the contractors to submit a bid bond with their bid. The bid bonds are purchased by the three contractors from sureties. The School District decides to accept Contractor Ys bid. Contractor Ydeterminesthattheyhaveunderbidtheprojectanddecidesnottoexecutethecontractandnotto perform the work. In this instance, the School District can make a claim against the bid bond due to ContractorYsfailuretoabidebyitsbid.Thus,abidbondisatypeofbond(oftenrequiredonpublic construction projects, but not exclusively) designed to protect the owner in the event that the bidder refuses toenter intoacontractafter thecontractis awarded orthebidderwithdrawshis bid beforetheaward.Abidbondisanindemnitybond,whichwillbediscussedbelow. Example2:PerformanceBond Municipality 123 retains Contractor AB to construct a municipal swimming pool at its recreation center. Contractor AB enters into a written contract and begins performing the work. During the performance of the work, Contractor AB goes out of business leaving the work about 50% finished. Additionally, some of the work that was performed was defective. Contractor AB has provided Municipality 123 with a performance bond. Municipality 123 can assert a claim against Contractor ABs performance bond for the cost to perform the unfinished work and the cost to correct the defective work. Thus, a performance bond protects the owner from the contractors failure to perform in accordance with the terms of the contract. A performance bond does not provide protection against subcontractor or suppliers who have not been paid. A performance bond is also anindemnitybond. Example3:PaymentBond(Advance) Public Water District QQ has retained Contractor ZZ to install a new water tower. Because the project was over $25,000, Contractor ZZ was required by the Water District to provide a payment bond. Contractor ZZ completed the work, but failed to pay Subcontractor X for its work. Subcontractor X cannot pursue any claim against the Water District. However, Subcontractor X can assertaclaimagainstthepaymentbondfortheamountowedtoitforitsworkontheproject.Thus, a payment bond is designed to provide security to subcontractors and materials suppliers to ensure paymentfor theirwork,laborand/ormaterials ontheproject.Apaymentbondisalsoan indemnity bond. Indemnity Bonds: As set forth above, bid bonds, performance bonds and payment bonds are indemnity bonds. These bonds are not insurance policies. If a covered claim arises against a commercial general liability policy, the insurer has a contractual obligation to indemnify and defend the insured (i.e. the party obtaining the policy) and cannot seek repayment from the insured for amounts paid out as a result of a covered claim. If a claim arises and is paid out on a bid bond, performance bond or payment bond, the surety (the party issuing the bond) will look to the contractortoindemnifyanddefendit.So,ifaclaimisassertedagainstContractorXYZsperformance bond, the surety is going to look to Contractor XYZ to defend the lawsuit and to pay any damages. Please let me know if you have any questions concerning the foregoing. Additionally, we would recommendthatyouconsultwithyourattorneyregardinganyspecificscenarios.