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Payment Bonds

Payment Bond

Here's an eye-opening statistic from the National Association of Home Builders: 75% of the cost of the average home goes to subcontractors. In home building and in most construction projects, subcontractors perform the bulk of the actual work on behalf of the contractors and construction companies that hire them. In order to ensure the subcontractors get paid, many project owners require their general contractors to take out payment bonds before any work begins. This is a small but essential part of many construction projects - one that anyone who works with subcontractors, laborers, or material suppliers needs to understand. Rely on the team at Viking Bond Service to explain everything you need to know about payment surety bonds.

What is a Payment Bond?

Payment Bonds guarantee that any subcontractors, 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.

Who are the Parties in a Payment Surety Bond?

Payment Surety Bonds involve three parties:

  • The principal is the contractor purchasing the bond to guarantee payment to all subcontractors, suppliers, and laborers. By entering into the surety bond agreement, the principal also agrees to take financial responsibility for any and all valid claims filed by the obligee.
  • The obligees are any subcontractors, suppliers or laborers working for the bonded contractor. This party also has the right to file a claim for damages against the surety bond if the principal does not pay as required.
  • The surety is the company who underwrites and issues the Payment Bond. The surety commits to financially backing the bond, meaning they will step up to pay for all valid claims up to the bond penalty amount. When that happens, however, the principal must pay that same amount back to the surety with interest and fees.

When Do I Need a Payment Bond?

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.

Why Do I Need 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.

Benefits for the Obligees:

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 surety 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.

Benefits for the Principal

As the party in the surety bond agreement that bears the entire responsibility, the principal might not seem to benefit from Payment Bonds. But surety bonds do benefit the principal for the same reason they benefit the obligee: establishing trust between partners in a contractual agreement. Finding subcontractors, laborers, or suppliers to work with becomes much easier when potential partners know the Payment Surety Bond guarantees they will receive whatever is owed to them.

Bid Bond vs. Performance Bond vs. Payment Bond

Payment bonds are often grouped together with bid bonds and performance bonds - two other types of surety bonds - because they all cover common but different aspects of the construction process. Bid Bonds protect the obligee in case a contractor pulls out of an awarded contract, and Performance Bonds protect them if the work falls short of what the contract calls for. Payment Bonds round things out by helping to ensure that everyone gets paid. Someone who needs a Payment Surety Bond often needs the other two kinds of bonds as well, which is why it's common to work with one surety company for all three. After decades of experience, Viking Bond Service knows how to make this process easy.

How Much Are Payment Bonds Written for?

Payment Bonds are often written for the expected costs of subcontractors, suppliers, and laborers. That means the surety agrees to pay out all valid claims up to the amount the surety bond is written for, but not to exceed that amount.

How Much Do Payment Bonds Cost?

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%.

Can You Get a Payment Bond With Bad Credit?

That depends on where you apply for a Payment Surety Bond. Some companies consider an applicant with a low credit score or a blemish on their business or financial history to be too high of a risk to work with. They will deny these applicants outright. Other companies recognize that getting the required bonding helps companies grow, and find ways to get far more applicants approved for all kinds of surety bonds. Viking Bond Service embodies this commitment to service and accessibility. We have created a program especially for bad credit applicants that we encourage anyone to take advantage of.

How Are Claims Handled for a Payment Bond?

If a payment issue progresses to the point where the obligee files a claim against the surety bond, there's likely a dispute between the principal and the obligee. The surety must verify any claim it receives rather than taking the word of either party. After conducting a thorough investigation utilizing whatever resources necessary, the surety will pay valid claims in full. Then the surety will attempt to collect the amount of the claim from the principal, who has final financial responsibility and must abide by whatever conclusion the surety company reaches regarding the claim.

What Do You Need to Secure a Payment Bond?

Payment Bonds 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:

  • The contract terms for the job
  • The bond amount that you need
  • Credit check
  • Your work record
  • Your financial qualifications

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.

Get Your Payment Bond Fast from Viking Bond Service

Bonds for smaller amounts generally get processed 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. Speak to one of our surety bond specialists by calling 1-888-278-7389, or connect with us through the form on this page. And don't forget that you can request a free, no-obligation quote at any time.

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