Payment Bonds guarantee that any sub-contractors, laborers, and suppliers involved in a contracted project are paid properly and in conjunction with regulations, even in the event that the lead contractor goes bankrupt during a project.
Payment Surety Bonds involve three parties:
Usually, contractors purchase the Payment Bond in the same package as Performance Bond during the contract negotiation phase before beginning a construction project. Contractors must be licensed and possess a Contractor License Bond in order to legally work as a contractor and to secure a Payment Bond.
Payment Bonds are mandatory on all federally funded projects of $100,000 or more, due to the Federal Miller Act. Most state funded projects also require Payment Bonds. These state level requirements are often referred to as "Little Miller Acts."
Many private project developers will require Payment Bonds as well, and they are usually issued together as a package with performance bonds.
Payment Bonds protect subcontractors against lead contractors who do not fulfill their terms. In the event that a contractor does not pay their obligees, they can file a claim on the Payment Bond to receive compensation.
The surety investigates all claims to determine the legitimacy. For legitimate claims, the surety compensates the obligees for as much as the full amount of the bond. Then, the contractor (principal) is required to reimburse the surety for any payments they made to the obligees as a result of claims against the Payment Bond.
Payment Bonds are often written for the expected costs of subcontractors, suppliers, and laborers.
The amount that you pay for your Payment Bond (the premium) is a percentage of the amount of the contract. The percentage (rate) that you pay will vary based on a number of factors, including your business history, and personal credit score. With a strong credit score, you are likely to be able to secure a Payment Bond at a rate between 1% and 4%.
Payment Bonds are are riskier for underwriters than standard commercial bonds, making them more difficult to qualify for. There are fewer programs for lower credit score applicants. You may be able to qualify with a lower credit score if you have positive, accurate business financial records prepared by a professional construction CPA.
When applying for a Payment Bond, you should expect to provide:
Projects valued at $250,000 or more require a more extensive application process that often includes further financial records, business documentation, and proof of experience in the industry.
Bonds for smaller amounts generally happen pretty quickly, while the in depth underwriting process for higher amounts takes a little bit longer. We can help you get your Payment Bond in just a few business days once we've received your application, and we can help you with the process to get your application through as quickly as possible.
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