What is Performance and Payment Bond (P&P Bond) ?
Definition of Performance and Payment Bond (P&P Bond) in Construction
This is a formal legal document that is basically an insurance policy to the owner which guarantees that the contractor will complete the project.
The performance portion of the bond is the assurance that the contractor will complete the job in a timely and professional manner. However the use of a P&P bond as an incentive to properly schedule and complete the project in a timely fashion is difficult to enforce. Basically the P&P bond assures completion, one way or the other. The Payment portion is the assurance that the contractor will pay the appropriate parties, per contract, and the owner will not be left with un answered liens or payment issues.
A P&P bond is basically an insurance policy that guarantees that the project be completed and paid for in accordance with the signed contract documents. In most public projects, a P&P bond is required. In private or residential projects the requirement for a bond is based upon the owners knowledge of the contractor. The securing of a P&P bond will require a payment of approximately 2% of the cost of the project. Therefore the owner can save considerable money , if they do not require the P&P bond. There are several bonding companies that specialize in the issuance of P&P bonds to contractors. There is no expense to the bonding company, until there is a bond claim, therefore the premiums are basically profit, until an issue arises. Bonding companies employ a contingency of lawyers, accountants and professional representatives, to ensure that if there is a claim on the bond, they have the ability to orchestrate the most comprehensive and professional defense against the bond claim. Bonding companies are normally backed by substantial financial capabilities, therefore the owner of a project realize that the money is available through the bonding company to complete the project. However, the fight to obtain that money is not easy.