What is a payment bond?
A payment bond is a type of contract bond that contractors post, guaranteeing payment to suppliers, laborers, and subcontractors on a current project. These bonds are required for federal government projects over $100,000, according to the Miller Act. The “Little Miller Acts,” based on the federal version, requires contractors on state projects to post payment bonds as well.
Contractors often obtain payment and performance bonds simultaneously (on the same bond form) and use them in conjunction.
Payment bonds, like other surety bonds, involve three parties:
- An obligee who requires the bond (e.g., project owner)
- The principal (contractor)
- A surety company (bond underwriter)
Quick Takeaways
- A payment bond is a type of contract bond that contractors post, guaranteeing pay to suppliers, laborers, and subcontractors on a project.
- It ensures that payments comply with federal and state laws.
- A payment bond typically cost about 1-3% of the contract amount for those with strong financial backing and work history.
How do payment bonds work?
Contractors (or subcontractors) typically obtain payment bonds at the start of a new construction project. These bonds protect those supplying labor and materials for a project by ensuring they are paid properly and on time. They also guarantee that payments comply with federal and state laws.
If a contractor fails to pay their supplier or subcontractors, a claim can be filed on the payment bond. The surety company would investigate the situation to determine if the claim is valid and what action they should take to remedy the issue. If the claim is valid, the supplier and subcontractors may receive compensation up to the value of the payment bond. The principal will then indemnify the surety. Payment bonds provide the obligee with protection, so that no liens will be filed on the property of the project owner.
How much does a payment bond cost?
A payment bond typically costs 1-3% of the contract amount for contractors with strong financial backing and work history. If a performance and payment bond are issued on the same project, you do not have any additional cost for a payment bond. This percentage is known as your “surety bond premium.” The total bond amount is called a penal sum – the amount of coverage required by law for a project.
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If you need a $100,000 bond, for example, and pay 3%, your bond would cost $3,000. However, if someone files a claim against your bond, you could be liable for the total bond amount. This is why bonding is essential. It encourages contractors to remain in good legal standing and carefully abide by contract terms.
Factors that Influence the Bond Cost
- Creditworthiness
- Financial history
- Work experience
- Conditions of the contract and coverage required
- Type of project
- Location
Payment Bond vs. Performance Bond
Since payment and performance bonds are so closely related, we want to clear up any possible confusion. While often issued simultaneously – after a contractor wins a bid – each bond has a distinct purpose.
A performance bond offers financial security for a project owner, ensuring their contractor performs a job according to their agreement and contract. A payment bond protects suppliers and subcontractors by holding the contractor accountable, ensuring he or she pays them as agreed in the contract. In a roundabout way, this also protects the project owner, ensuring no liens are filed.
Can you get a payment bond with poor credit?
“Are contractors with bad credit bondable?” It can be more challenging to obtain the bonds you need if you have poor credit, but it may not be impossible. Some companies may turn you down, while others might offer you a bond if you pay a higher premium.
Other agencies, like ZipBonds, can help connect you with affordable bonds. We have a vast network of sureties and can impartially shop to find you a great match – a company that provides excellent coverage at a fair rate.
Get a Performance Bond in Your State
Need a performance and payment bond for your next project? Gather essential information like your bid amount, bid date, business history, and credit score, and we’ll do the rest. Select your state below to begin our simple bonding process.
About ZipBonds.com
Founders Ryan Swalve and Zach Mefferd formed the vision for ZipBonds.com when they realized how overly complicated it was to help clients place surety. The frustration of being unable to incorporate the technology they’d used in other insurance-focused projects left them thinking “there has to be a better way.”
Fast forward a couple of years, and that better way is the impetus of everything we do at ZipBonds. We constantly look for innovative ways to improve the bonding process for our clients and agents. Our team comprises individuals who understand all angles of surety – for companies, agencies, and individuals. Incorporating everyone’s point of view to improve the process while simultaneously integrating cutting-edge technology is what sets our business apart.