What is a Payment Bond
A payment bond, a type of surety bond issued to contractors, guarantees that all entities associated with the project will receive their payments. A payment bond is a legal contract that protects certain employees, subcontractors, and suppliers from non-payment. These bonds are also known by the common names “construction” and “labor and materials”. These bonds are also known as “Miller Act Bonds” in government contracting.
Private construction bonds can be either unconditional or conditional. An owner can have a lien placed on his property by an unconditional payment surety. Owners with conditional sureties (or “pay when paid”) have limited protection. A construction lien can be placed upon the owner’s property but the owner has limited time to transfer the lien to the surety.
Payment Bond vs Performance Bond
A payment bond is usually issued in conjunction with a performance bond. Payment bonds guarantee that certain people will get paid and performance bonds promise the project will be completed according to plan, including by the deadline. Both payment & performance bond guarantees guarantee compliance with applicable laws.
Bonds can be used to recover money from subcontractors, subcontractors, laborers and material suppliers. Professionals such as architects have often recourse to the construction payment bond. If the project is not completed in full or at all, project owners can file claims on surety bonds. A “liquidated damages clause” is a clause that requires the contractor to deduct a specific dollar amount per day from any work not completed within the agreed dates.
What are sureties?
They are basically legal contracts that promise that the company (the surety), issuing the bond, will assume your financial liability to another person (the obligee), if you fail or neglect to comply with your legal obligations, up to the bond amount. You, the principal, agree to repay the surety company in case they have to pay for a claim against your bond.
Construction Payment Bond
Do You Need One?
You must get a bond before you can bid on a project. A bond is required for a prime contractor working on a construction project.
Prime contractors must have these bonds for federal contracts exceeding $100,000, according to the Miller Act. For overseas contracts, exceptions may be made. Nearly all state contracts have the same requirements. Each state’s “Little Miller Act” regulates them. The federal Miller Act (after which Little Miller Acts are named) regulates the bond requirement. It ensures that subcontractors, suppliers, and laborers of all levels have recourse to recovery in the event they aren’t paid as agreed.
Private contracts, most often construction contracts, may require payment sureties to also be posted by the primary contractors. Private projects that require sureties will detail the amount of protection and bond amount required in the contract. Learn more at our What is a Contractor Bond page.
What if I don’t need one?
Even if you don’t have to provide a bond, it is a good idea. You will be more credible with the owner of the project and your subcontractors, and you will likely attract better-quality subcontractors for your project.
A good indicator of the strength and stability of your company is to qualify for any type of guarantee. Working with a surety will allow you to access professionals like lawyers, accountants, and other experts who could be able to offer invaluable advice. You can also submit more tenders as a contractor due to the increased leverage you have from your bond. This will result in more contracts and higher revenue.
How much do they cost?
Your credit score, financial strength, and contract value will all impact your price of yours. The cost of payment bonds ranges from 1% to 4% of the total amount. The contracting officer sets the total amount of bonding required for a government contract and it cannot be lower than the performance bond amount. However, a contracting officer can reduce the amount of construction payment bond coverage.
How do I Get One?
Before you can obtain a surety, ensure that your business is legally operating in the state you reside in. Before obtaining bonds for a project, contractors must be licensed and bonded. You will need to purchase a contractor’s bond from a surety firm. Only then can a surety be issued.
It is almost always issued as a bundled performance and payment bond if they are needed. You will see this more often if you use a Bid Bond, Performance, and construction Payment Bond. The surety will evaluate your credit and financial strength before issuing you or the company a bond. However, these bonds can often be obtained even if you have poor credit or bad finances.