Performance Bonds and Commercial Construction Loans

A payment and performance bond is a financial tool used to guarantee that in the event of a developer or contractor default, funds are available to finish the construction of the commercial project.

A performance bond guarantees the faithful performance of the commercial construction contract; i.e, that the commercial project will be completed.  The payment bond guarantees the payment of materials and labor by the contractor to all subcontractors and material suppliers.

The party most likely to require to require a payment and performance bond is the commercial construction lender.  The construction lender requires the bond to reduce its construction risk (see prior blog article).  The cost of the bond is borne by the borrower/developer.

Payment and performance bonds are issued by surety companies, a special kind of insurance company.  Not all contractors are bondable.  A surety company could easily look at the financial statement and CV (resume) of the general contractor and conclude that the general contractor is not qualified to work on the project.

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