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Adams and Reese Construction Team Leader Trent Cotney discusses payment and performance bonds – two of the most used bonds on construction projects – in “Understanding Payment and Performance Bonds.” Cotney’s article is published on the website of the Florida Roofing and Sheet Metal Contractors Association, Inc., where he serves as General Counsel.
A payment bond is a guarantee that the principal of the bond (contractor) will make payments to subcontractors and material suppliers. These bonds are a type of surety bond and are quite common on construction projects. In keeping with the provisions of the Miller Act, most federal and state projects require surety bonds. Parties that might require a surety bond include government agencies, lenders, commercial owners and developers.
A surety bond is essentially a contract in which one party (namely, the surety company) guarantees that a second party (the principal) will uphold specific obligations to a third party (such as a material supplier or subcontractor). Payment bonds are obtained to ensure payment if there is a subtier claim.
While a payment bond helps ensure payment, a performance bond addresses a customer’s satisfaction with the job. Performance bonds are common in many industries, including construction and help ensure the completion of projects. These bonds cover the ability of contractors to perform and finish the job in keeping with the contract requirements.
Three parties play a role with a performance bond: the primary contractor or principal, the surety (the company offering the bond) and the obligee (a third party, usually the owner). If the contractor fails to adequately perform, the surety has a choice of different options to ensure project completion.
When there is a claim on either a payment or performance bond, the surety will consider the contractor’s financial stability, assets and credit. Often, a surety may examine the company’s financials or even require collateral be posted for the claim. In addition, the surety may retain separate counsel for the bond claim. Under the terms of the surety agreement, the principal/contractor would have to pay for the surety’s attorney’s fees as well as their own.
Cotney said there has been a surge of bond claims against roofing contractors and, unlike insurance claims, a bond is often supported by a personal indemnity obligation executed by the owners of the business (and sometimes their spouses). It would be prudent to avoid bonding obligations on projects if possible and strike contractual language requiring the use of bonds.
About Trent Cotney: At Adams and Reese, Cotney is a leading member of one of the largest construction practices in the country with more than 90 attorneys on the construction team.
A Partner in the Adams and Reese Tampa office, Cotney represents construction and infrastructure clients, including GCs, subcontractors, suppliers, manufacturers, architects, engineers, roofers, developers, and other professionals. Cotney is a board-certified construction lawyer licensed in eight states and Washington, DC. Cotney is an EU arbitrator for construction-related disputes. He is also experienced in construction litigation and arbitration, including OSHA defense, lien law, bond law, bid protests, and construction document review and drafting.
Cotney is ranked among the top construction attorneys in Florida by Chambers USA and ranked by Best Lawyers, and Super Lawyers in Florida, Texas, Mid-South, and Illinois.