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How Do Bid, Performance and Payment Bonds Work?

Bid & Performance Bonds Explained
Contractor I'm a contractor new to surety bonding and need some guidance. I want to bid on public work, but I don't know how bid and performance bonds work.
JW Sure, I can help. First let's take a look at bid bonds. They are required for you to submit your proposal on public contracts. Think of the bid bond as your foot in the door so to speak.
Contractor That's straightforward enough. I previously learned that all surety bonds guarantee something, so what do bid bonds guarantee?
JW Good question! The bid bond guarantees that if you are awarded the contract that the bonding company will provide you a performance bond. That's why bonding companies have to underwrite the performance bond prior to issuing the bid bond. If they write a bid bond for you and fail to provide the performance bond, the government can place a claim on the bid bond.
Contractor Ok, so then what does the performance bond guarantee?
JW The performance bond is what actually guarantees your work. Should you fail to complete the project per the terms of the contract, a claim can be placed on the performance bond.
Contractor That makes sense. I've heard people call it a "performance & payment bond". Is that the same thing?
JW A payment bond guarantees that you will pay your sub-contractors and suppliers. Since this goes along with completing the contract in full, the payment bond is usually lumped in together with the performance bond.
Contractor Awesome! So I only pay for the bid bond and the performance bond...What are the costs?
JW You've just opened up another discussion. We'll talk about performance and bid bond costs in our next video.
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