Saturday, October 16, 2010

Bonds, bonds and more bonds!

The term "bond" is thrown around often in the construction industry.  In fact bonds have become a crucial part of doing business.  But there are a few different types of bonds that serve different purposes. 

Payment Bonds

A payment bond is a bond that is usually obtained by the general contractor as a requirement of the owner.  The payment bond secures that all subcontractors and suppliers are paid by the general contractor.  The payment bond protects the owner because it can prevent subcontractors and suppliers from filing mechanic's liens when they are not paid.  The payment bond protects subcontractors and suppliers because it is an added security for payment.  Making a bond claim is almost always much easier, cheaper and quicker than enforcing a mechanic's lien if you are not paid. 

Performance Bonds

A performance bond is a bond that is also usually obtained by the general contractor as a requirement of the owner.  The performance bond is a security for the owner against the general contractor's non-performance.  If the work performed by the contractor is defective or deficient it is usually something that will be covered under the performance bond.  Likewise if the general contractor simply does not or cannot complete the project the performance bond protects the owner against the failure to perform.  The surety that issued the performance bond will usually hire someone else to come in and correct the defective work or complete the project. 

Mechanic's Lien Discharge Bonds

When a mechanic's lien is place on a piece of property one way to remove the lien is to obtain a mechanic's lien discharge bond.  A mechanic's lien discharge bond is obtained from a surety and by statute will be 110% of the amount of the mechanic's lien.   Essentially the mechanic's lien is removed from the real property and attached to the mechanic's lien discharge bond. 

Maintenance Bonds

Maintenance bonds are bonds that more or less guarantee the construction work for a period of time.  For example, the bond may provide that if an item fails the contractor will come back and repair it free of cost.  If the contractor does not do so, and should have done so, the surety that issued the maintenance bond will hire someone to correct the issue. 

Bid Bonds

A bid bond is usually seen on public projects.  Every contractor submitting a bid on the contract is required to include a bid bond.  A bid bond protects the owner against financial loss if the bidder (the contractor) withdraws the bid or does not enter into a contract for the project if the bid is won. 

Vincent T. Pallaci is a partner at the New York law firm of Kushnick Pallaci, PLLC where his practice focuses primarily on the area of construction law.  He can be reached at (631) 752-7100 or


  1. There are also completion bonds, which can be likened to a performance bond on steroids. While performance and payment bonds are vitiated by an Owner default, completion bonds are _triggered_ by an Owner default. I have used these when the ground lessee under a long-term ground lease wants to demolish and reconstruct the building. So long as the plans are approved, and the ground lessor has a completion bond that is financially sound and exercises some due diligence to make sure the contractor actually builds the replacement building, the fee owner should be safe.

  2. with regards to a contractor's Performance bond is there any examples of the owner hiring a firm to complete a construction project, rather than allowing the surety/bonding company to hire a replacement contractor?

  3. There certainly are those situations but whether the surety is then liable for the cost of the completion is a different story. You have to read the terms of the performance bond to see what the owner's rights and obligations are and what the surety's rights and obligations are. Why would the owner want to hire a contractor separately if the surety is agreeing to handle the completion?