So, What Are Payment and Performance Bonds Anyway?

By James Germano, Esq., Manager and Counsel, AIA Contract Documents

March 11, 2022

If you’re in the construction industry, you’ve probably heard the term “payment bond” or “performance bond” before. You may have even seen some. But it is important to understand the nuances, similarities, and differences between these two documents, particularly if they are required for your project.

A performance bond is an assurance by the contractor and the contractor’s surety that the work will be performed and completed in accordance with the terms of the construction contract. In this sense, a performance bond looks “up” from the contractor to the owner. It is the owner who typically requires – and benefits from – the performance bond.

A payment bond, on the other hand, is an assurance by the contractor and the contractor’s surety that labor and materials bills incurred in connection with the construction contract will be paid. In this sense, a payment bond looks “down” from the contractor to its subcontractors. It is the subcontractors who benefit from a payment bond. Though, the owner receives an indirect benefit from payment bonds, too – if subcontractors and suppliers are paid, there is less of a chance of a lawsuit or mechanic’s lien.

The assurances in these documents are limited by the amount of each bond. Normally, these bond forms are prepared for execution by the Surety or the Surety’s agent.

AIA Document A312™–2010 combines two separate bonds into one form. This is not a single combined performance and payment bond, however. It is customary to issue these two bonds simultaneously and to pay one premium for both.

AIA Contract Documents has provided this article for general informational purposes only. The information provided is not legal opinion or legal advice and does not create an attorney-client relationship of any kind. This article is also not intended to provide guidance as to how project parties should interpret their specific contracts or resolve contract disputes, as those decisions will need to be made in consultation with legal counsel, insurance counsel, and other professionals, and based upon a multitude of factors.