Performance and payment bonds are types of surety bonds required for most public and many private construction projects to guarantee their completion. And because many prime contractors require similar subcontract performance and payment bonds to guarantee subcontractors' performance and payment, it is important you understand how these bonds work.
Surety credit extension
The word "surety" suggests assurance and guarantee. That is exactly what a surety does when a performance and payment bond is executed in support of a construction contract—the surety ensures and guarantees the bonded construction contract's terms and conditions.
Many surety providers also insure property, casualty and liability. However, the extension of a surety bond is a credit function and not an insurance policy. Unlike insurance, which manages the severity and frequency of insurance losses through underwriting principles, deductibles and risk-control functions such as safety training, sureties expect the contractors they bond to complete construction projects and satisfy all contract terms and conditions.