Successful completion of any project requires that the contractor performs all obligations effectively, and that it gets completed on time. It also requires that sub-contractors, laborers, and material suppliers are also paid accordingly.
This is where a payment bond comes in. It is one of the most claimed surety bonds. According to its terms and conditions, all of a contractor’s service providers in the project will get paid, even if he/she defaults or goes bankrupt. This inspires trust among service providers.
How Payment Bonds Works
A payment bond involves three parties:
- The principal is the contractor – the person or company originally assigned to complete a project. This entity has to buy the payment bond. They do this to guarantee their sub-contractors, suppliers and laborers that they will get paid for their services.
- Then there’s an obligee. An obligee is an entity that requires the bond. In this case, it will be all of contractor’s service providers.
- The surety agency is the entity that is responsible for underwriting the bond according to set guidelines. They then issue the bond.
Do You Need a Payment Bond?
According to the Federal Miller Act, it is mandatory (in most states) for a contractor to obtain a payment bond for projects that are worth$100,000 or more.
In private projects, the project owner might require you to get a payment bond. Generally, a payment bond is obtained by the contractor along with the performance bond. This means that you will have to get the payment bond before the start of the project.
High-valued projects, ones that are worth more than $400,000, would require more extensive application procedures.
The Real Beneficiaries of Payment Bonds
As mentioned above, payment bonds are meant to protect the obligees. In the event a contractor fails to pay them, the obligees can claim the bond for their due compensation.
The authenticity and legitimacy of their claims will be determined by the surety. If the claims are found to be truthful and the contractor cannot pay, the surety pays them with the bond amount.
Cost of the Payment Bond
When under writing payment bonds, the surety agency estimates the costs of subcontractors, suppliers and laborers.
The amount paid to the surety agency for the payment bond is a percentage of the total bond amount. To determine this amount, a variety of factors, such as financial strength, credit history, etc., are considered. If you have a reasonable credit score, you can obtain payment bond at around 1% to 4% of the bond amount.
How BondPro Can Help
BondPro is one of the leading payment bond agencies in the United States.With an incredible underwriting experience of more than 60 years, our agency helps contractors get payment bonds in a smooth and efficient manner.
As soon as we have received your application and have verified details, we start the underwriting process. With us, you can have your payment bond prepared in just a few business days. Our team issues bonds across 50 states in the United States.
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