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How Do Payment Bonds Work?

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Bonds

Regardless of the size of a construction project, there are multiple parties and companies working on it at the same time. These parties include laborers, material suppliers, and sub-contractors among others.

A payment bond is a surety bond that is designed for the construction industry. The primary purpose of a payment bond is to ensure that laborers, subcontractors and material suppliers and other service providers are paid appropriately.

Payment Bond 101

A payment bond is a three-way contract between:

  • The contractor or the principal who purchases the payment bond and is assigned to complete the project. The principal can be an individual or a company. They buy the bond as a guarantee that all the laborers, sub-contractors, suppliers, etc. working with them will be paid.
  • The project owner or the obligee that requires the payment bond from the contractor.
  • The surety company that underwrites and issues the payment bond.

According to the terms and conditions of a payment bond, the laborers, sub-contractors, suppliers, and other service providers will get paid by the contractor. As a result, payment bonds establish trust among service providers.

Who Needs A Payment Bond?

As per The Federal Miller Act, it is mandatory for contractors to get payment bonds for projects that are worth $100,000 or more. In most cases, contractors obtain a payment bond along with a performance bond.

A payment bond offers peace of mind to the obligee and they can seek compensation if the contractor fails to perform their duties. The surety agency will determine the authenticity of the obligee’s claims. If true, the surety agency will pay the obligee on behalf of the contractor.

What Is The Cost of A Payment Bond?

The cost of a payment bond is determined by a surety agency. Surety companies assess the estimated costs of subcontractors, suppliers, laborers and so on, to determine the bond price. In addition to this, the agency will consider a variety of factors, such as the contractor’s financial strength, credit history, work record, etc.

If a contractor has a reasonable credit score, they can expect a payment bond at 1 to 4 percent of the bond amount.

To find out the amount of premium you will be charged on a payment bond, get in touch with us. As one of the leading surety bond agencies in the country, BondPro, Inc. provides payment bonds to contractors in 50 states.  Get an online payment bond quote now.

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