Payment Surety Bonds
If you are new to the construction or contracting industry, you may be wondering, “What is a payment bond?”. A payment surety bond (P-Bond) is a legal contract, a type of bond, that guarantees certain employees, subcontractors, and suppliers are protected against non-payment. Payment bonds fall under the bonding category of contract bonds. Other common names for payment bonds include “construction bond”, “contract payment bond”, and “labor and material bond”. 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 a lien being placed on their property. Conditional bonds (“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.
What is a Payment Bond vs. a Performance Bond?
Payment sureties are normally issued simultaneously with a performance bond. A payment surety bond promises 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 payment surety. Claims on performance 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. We only bond with Top-rated carriers, such as CBIC, They are a Contractors Bonding and Insurance Company that specializes in construction related bonds. CHUBB is also a phenomenal payment surety bond carrier. that we like to use. Call us for all your Payment and Performance Bond needs!
What are sureties?
A bond is a legal contract 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.
Do I Need One?
If you win a bid for a project that requires payment bonds, 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 surety bonds 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.
What if I Don’t Need One?
Even if you find that are not required to furnish a bond, it is usually a good idea to do so. Bonds increase your credibility with both the project owner and with subcontractors and likely will draw better quality subcontractors to your project.
Qualifying for any type of bond 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 your bond will depend on a variety of factors, including your background, credit, financial strength and the dollar value of the contract award. Bonds generally range in price from 1% – 4% of the total bond amount. The total bond amount of the payment bond for a government contract is set by the contracting officer and cannot be less than the perf. bond amount. A contracting officer does have the authority to lower the coverage needed in the payment surety, though.
How do I Get Payment Bonds?
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 license bond (“contractor’s bond”) from a surety company, such as NFP Surety. Only then can a surety be issued.
Where a P-bond is required, it is nearly always issued under a bundled “Payment and Performance Bond” or, more often, under a “Bid bond, Performance, and Payment Bonds”. 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, a P-bond can be usually obtained even if your credit or finances are less than perfect.
At NFP Surety, we have been the industry leader in all surety types since 1984. Let us help you place your payment surety bond with one of our top-rated carriers today! We have programs for applicants with bad credit as well. We bond nationwide!