A payment bond is a type of surety bond issued to contractors which guarantee that all entities involved with the project will be paid. A payment surety bond is a legal contract, a type of bond, that guarantees certain employees, subcontractors, and suppliers are protected against non-payment. Other common names for these include “construction”, and “labor and material”. In government contracting, these bonds are sometimes referred to as “Miller Act Bonds”.
Private construction bonds are either conditional or unconditional. Under an unconditional payment surety, an owner is fully protected from having a lien placed on their property. Conditional sureties (“pay when paid” clauses) afford the owner only limited protection, as a construction lien can be placed on the owner’s property, but the owner then has a limited amount of time to transfer the lien from the property to the surety.
Payment vs. Performance
Payment bonds are normally issued simultaneously with a performance bond. Payment bonds promise that certain people will be paid, and performance bonds promise that a project will be completed as agreed, including being finished by the completion date. Payment and performance sureties both also assure compliance with applicable laws and regulations.
Subcontractors, sub-subcontractors, laborers, and material suppliers seek recovery under bonds. In many cases, professionals such as architects also have recourse under the construction payment bond. Claims on surety bonds are made by project owners if the project was not completed in its entirety or at all. Work not completed by agreed-upon dates usually trigger a “liquidated damages” clause, where the contractor must deduct a specified dollar amount per day from the price of the contract. At NFP, we only bond with top-rated carriers.
What are Sureties?
Simply put, they are legal contracts promising that the company (the surety) issuing you the bond will take on your financial liability to another party (the obligee) if you fail to fulfill your legal obligations of an agreement, up to the bond amount. In this contract, you, (the principal) promise also to repay the surety company if they need to pay on a claim on your bond.
Construction Payment Bond
Do I Need One?
If you win a bid for a project that requires a bond, you must obtain it before project commencement. For the most part, a prime contractor on a construction project will need a bond.
These bonds are required of prime contractors on all federal contracts totaling $100,000 or more, per the Miller Act. Exceptions are made for overseas contracts. Nearly all state contracts have similar requirements, regulated by each state’s “Little Miller Act”. The federal Miller Act, after which Little Miller Acts are modeled, regulates the bond requirement, ensuring that first- and second-tier subcontractors, suppliers, and laborers have recourse for recovery if they are not paid as agreed.
Many private contracts, usually construction contracts, require payment sureties to be posted by the primary contractor as well. Private projects requiring sureties will specify the scope of protection and bond amount needed in the body of the contract. Want to learn more… visit our what is a contractor bond page.
What if I Don’t Need One?
Even if you find that you are not required to furnish a bond, it is usually a good idea to do so. They will increase your credibility with both the project owner and subcontractors and likely will draw better quality subcontractors to your project.
Qualifying for any type of sureties is also a good indication of your company’s strength and stability. Furthermore, when you work with a surety, you will have access to professionals such as accountants, lawyers and others who may be able to offer you invaluable advice. Lastly, as a contractor, you can submit more tenders with the increase in leverage gained by your bond, leading to even more contracts and increased revenue.
How Much Do They Cost?
The price of yours will depend on a variety of factors, including your background, credit, financial strength and the dollar value of the contract award. They generally range in price from 1% – 4% of the total bond amount. The total amount of bonding for a government contract is set by the contracting officer and cannot be less than the performance bond amount. A contracting officer does have the authority to lower the coverage needed in the construction payment bond, though.
How do I Get One?
Before obtaining a surety, you must ensure that you are operating legally in the state where your business is located. Contractors must be licensed and bonded before obtaining bonds for a project. This requires purchasing a contractor’s license bond from a surety company, such as surety by NFP. Only then can a surety be issued.
Where they are required, it is nearly always issued under a bundled “Payment and Performance” or, more often, under a “Bid bond, Performance, and construction Payment Bond”. Although the credit and financial strength of your company (and sometimes you, personally) will be evaluated by the surety before issuing you or your company a bond, they can be usually obtained even if your credit or finances are less than perfect.
At NFP, we have been the industry leader in all surety types since 1984. Let us help you place your bond with one of our top-rated carriers today! We have programs for applicants with bad credit as well. We bond nationwide!