Construction projects demand extensive collaboration between multiple parties, such as contractors, subcontractors, suppliers, and project owners. In this intricate web of transactions, it’s crucial to establish a reliable system that protects the interests of everyone involved and guarantees timely payments for the hard work and resources invested.
Enter the payment bond – a powerful tool designed to safeguard the financial integrity of construction projects, providing peace of mind to all stakeholders.
Whether you’re a contractor seeking assurance of timely payments or a project owner looking to minimize risk and maximize accountability, understanding payment bonds is paramount. In this blog post, we clarify how they work, how much they cost, when you need them, and more.
What is a payment bond?
A payment bond is a 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:
- Obligee requiring the bond (e.g., project owner)
- Principal (contractor)
- Surety company (bond underwriter)
How do these contract 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.
Bond Claims
A claim can be filed on the bond if a contractor fails to pay their suppliers or subcontractors. 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 suppliers and subcontractors may receive compensation up to the value of the payment bond. The principal will then repay the surety. These bonds protect the obligee so that no liens will be filed on the project owner’s property.
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.
For example, if you need a $100,000 bond and pay 2%, your bond would cost $2,000. 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 abide by contract terms.
Factors Influencing 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 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 they pay them as agreed in the contract. In a roundabout way, this also protects the project owner, ensuring no liens are filed.
Learn more about payment vs. performance bonds on our blog.
Can you get a payment bond with poor credit?
“Are contractors with bad credit bondable?” Obtaining the bonds you need can be more challenging if you have poor credit. 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.
Contact ZipBonds to learn more!
How to Apply for a Contract Bond
To obtain a contract bond, simply apply and pay online. ZipBonds offers the fastest and most secure option for getting the surety bonds you need. Our all-digital platform is intuitive and straightforward. Apply on our website or call us at 888-435-4191 to speak with an agent. We’ll help you get bonded in a flash!