The benefits of performance and payment bonds: the Illiana Expressway case

If you are just now making your way in the public works bidding arena as a construction contractor, there are a few terms and requirements that you will need to get acquainted with. Surety bonds are an important one, as several different kinds are often required in such projects and, more specifically, performance and payment bonds. They are not only a legal obligation for public projects – their importance to the contractor and the general public can be crucial in the completion of projects of high public interest.

 

What are performance and payment bonds?

Although there might be many terms to learn and regulations to comply with in a bidding and public project execution process, the concept of bonds is actually quite easy to grasp. A performance bond is a guarantee that contractors will complete the project according to the contract’s clauses.The bond provides a protection against the contractor’s default by guaranteeing protection via a Licensed Insurance Company. Thus, if the contractor is unable to complete the project, the Insurance carrier backing the bond either writes a check for the incomplete portion of the project or more commonly the insurance carrier hires a contractor at their own expense to complete the job. Bidding on public works projects often involves as a requirement providing a bid bond at the first stage, which is followed by performance and payment bonds after the selection of the contractor.

What are performance and payment bonds?

What are performance and payment bonds? [Video]

A payment bond is the natural continuation of a performance bond. It guarantees that the subcontractors and suppliers of a project would receive their payments from the general contractor under the contractual obligations. In cases of non-compliance, this is the only efficient protection for subcontractors besides suing the contractor, as they can make direct claims on a payment bond in case the contractor is not abiding by the contract.

Illiana Expressway: the benefit of performance and payment bonds

The Illiana Expressway, also known as the Illiana Corridor, is a rather important and large-scale highway construction project for the states of Illinois and Indiana. It will connect Interstate Highway 55 in Illinois with Interstate highway 65 in Indiana. Works should start in the next few years but the project has already been marred by some land acquisition issues, thus it is imperative that its construction is smoother so that the public is secured against contractor’s default and similar problematic cases. The most appropriate guarantee in such major construction projects is the protection provided by payment and performance bonds.

Illiana Expressway

Illiana Expressway – Preferred Corridor Map
Credit: Illinois Department of Transportation

First of all, as mentioned above, the issuance of a performance bond means that the contractor has passed an evaluation by the surety company in order to obtain the bond. This is a valuable pre-selection. Furthermore, the surety company itself provides a safety net because it is required to pay any legitimate bond claims and then seek reimbursement from the contractor. This is surely another level of security for the public project and thus for taxpayers’ money invested in it. On the next level, the payment bond is the safeguarding tool for the subcontractors and suppliers on the public works project as it guarantees they will be paid by the winning contractor according to the contract.

As the ultimate interest of the contractor, the public entity in this case, is that the Illiana Expressway is completed fully within the time framework and with all contract clauses and subcontractors’ payments duly met, it seems that the bonding with performance and payment bonds is the most efficient way to provide protection for this completion. This is just one of many examples how performance and payment bonds can be really useful in public works, thus their importance is significant in such projects.



2 Comments

Bosko

Hypothetically the tradesman (after the project it mostly completed) goes to the Labor Department. and ask for help, for allegedly not being paid or not being paid adequate wage. The and Labor Department issue letter requesting the owner to hold amount they think may be disputed while they ( Labor Department) are investigating. The tradesman was working for the subcontractor, subcontractor had provided certified payroll with each pay request. GC had furnished (based on the contract requirements) payment Bond to the owner. GC had provide certified payroll with each pay request. The owner ( based on the Labor Department issued letter) is holding disputed amount until investigation is completed. What is the purpose of payment bond in this case?

Reply
Eric Weisbrot

Bosko,

What you're referring to only assists in laborer's being paid the correct wage via certified payroll, but it in no way assists in making sure suppliers get paid for materials on that job.

The payment bond guarantees subcontractors and suppliers of materials on the job will get paid.

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