How do performance bonds and payment bonds differ?

The distinction between performance bonds and payment bonds is fundamental to understanding how surety bonds function within construction and contracting. Performance bonds ensure that a contractor completes a project according to the contractual terms, including specifications and deadlines. If the contractor fails to fulfill these obligations, the surety company that issued the bond is responsible for covering the cost of project completion or compensating the project owner for losses incurred due to non-performance.

On the other hand, payment bonds guarantee that the contractor will pay subcontractors, laborers, and suppliers associated with the project. This bond is crucial because it protects those who provide services or materials, ensuring they receive compensation regardless of the contractor's financial status.

The answer identifies these core roles accurately: performance bonds are focused on the successful completion of the contract, while payment bonds ensure that all parties involved in the project are compensated for their work. This clear differentiation is essential for stakeholders in a project to ensure financial protections are in place for both completion and payment aspects.