Performance and Payment Bonds on Public Work
Reference Guide #C-2
Payment bonds are required on all public work contracts led by school districts and BOCES. This is pursuant to Section 137 of the State Finance Law, which the State Education Department's Office of Counsel has determined does apply to school districts and BOCES.
Section 137 requires a "payment" bond which ensures payment for labor and materials. Technically the section does not require a "performance" bond which assures enough money to complete the capital construction contract. A payment bond and a performance bond have different purposes and are separate and distinct obligations of the Surety. However, we understand that it is standard practice to charge a single premium for both bonds, and there is no reduction in premium for issuing one bond without the other. Therefore, it only makes good business sense for a school district to REQUIRE BOTH A PAYMENT BOND AND A PERFORMANCE BOND. It is possible to obtain a combined form, although usually use of two separate bonds is recommended.
Each type of bond has important legal consequences, and consultation with an attorney or a bond specialist is encouraged with respect to completing or modifying the bond forms. The owner must be aware of the rights and responsibilities of the parties to a bond, of the time periods for various notices and actions, of the extent of available remedies, and of the various options available to the Surety if a default occurs.
It is important to point up a major benefit of using a surety (or any insurance company) that is licensed to do business in New York State, i.e., that the company meets standards set by the Insurance Department. In the event of failure of the insurer, the insured is protected by the State's Property/Casualty Insurance Security Fund. The Superintendent of Insurance of the State Insurance Department is responsible for assuring the financial integrity of insurance companies that operate in New York State. In any case, the Education Department has long recommended that school districts and BOCES check the financial stability of any insurance companies with which they are doing business. Ways to check include a review of the ratings of companies published by the A. M. Best Company or Standard and Poor's. The Insurance Department can advise if a company is licensed to do business in the State and publishes a directory of such companies.
Specifications for capital construction projects must be clear that both a payment bond and a performance bond are required; that they must be written by an acceptable surety licensed to do business in New York State; that they are on bond forms (which are usually bound into the specification) acceptable to the school district; and that the most recent A. M. Best Rating for the proposed surety be submitted by the successful bidder. Acceptable bond forms exist that have been endorsed by interested parties, such as the Surety Association of America, the American Institute of Architects (AIA), and the Associated General Contractors of America. Some are published by the Engineers Joint Contract Documents Committee, which represents the National Society of Professional Engineers, the American Consulting Engineers Council, the American Society of Civil Engineers, and the Construction Specification Institute. AIA document A311 (1970) incorporates a performance bond on pages one and two and a labor and materials payment bond on pages three and four.
sometimes various standard forms are amended or modified to the point that they may look authentic, but are not. It has been reported to us that bond forms have been amended to limit the bond coverage to the collateral of the principal. If the principal goes bankrupt and has no collateral, the bond is worthless. Submitted bond forms should be carefully reviewed to ensure adequate protection.