While performance bonds guarantee that the principal or contractor will perform a contract, labour and material bonds, also known as payment bonds, guarantee that the company will pay its direct subcontractors, suppliers, vendors and laborers for materials and services provided under the bonded contract.
The surety will charge an additional fee for this bond but generally is willing to issue the bond without substantial additional underwriting, provided the underwriter is confident the contractor has sufficient cash flow to make the payments as promised. Payment and credit history will provide the surety with a track record as will bank accounts details and payable lists.
These bonds are required by many projects with public funding and also by private owners, although private owners less frequently require their use. Labour and Material Bonds are normally accompanied by Performance Bonds.
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