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How Does a Payment Bond Work?

Payment bonds are a type of surety bond that ensures subcontractors and material suppliers get paid according to contract. The payment bond has a unique standing in the world of construction. It is different than other types of bonds because it ensures subcontractors and material suppliers are paid according to contract, which makes them critical for jobs on public property where mechanic's liens (or other types of security interests) cannot be used.

How Much Does A Payment Bond Cost?

The Cost of a Payment Bond depends on the type of the contract and risk of the contractor. Further, these are usually priced together with a performance bond (see here for more on what a performance and payment bond costs). Typically, the payment bond cost is around 1-3% of the overall contractual amount. Thus, if the contract is $100,000, then the bond cost is $3,000.

Who is protected by a payment bond?

Payment bonds ensure a contractor's subcontractors, material suppliers and laborers are protected. Without this protection these individuals could be left with unpaid wages or other debts if the project they were working on was cancelled for some reason. A payment bond protects anyone who has been involved in building something from being left without any money at all to pay their bills should things go wrong - but luckily it is not common that projects have to shut down completely.

The Miller Act protects subcontractors, suppliers and laborers in addition to those who work with a contractor. To do so it requires contractors to purchase payment bonds on most state projects.

How Payment Bonds Work

There are two types of contract bonds that protect parties from not being paid for the job done. The Performance Bond protects contractors who have promises to perform a contract in accordance with its terms and conditions, at an agreed upon price within time allowed. The Payment bond is designed to protect laborers, material suppliers or subcontractors against nonpayment by guaranteeing payment when it's due- which makes both contracts necessary for any construction project.

Do payment bonds expire?

With bonds, you need to renew them about 12 months after purchase. However depending on the type of bond and how long it is for, some don't have a renewal date at all.

How do I get a payment Bond?

We would be thrilled to get you a payment bond. Just go to our performance and payment bond page to get one.

Can I withhold payment from a contractor?

Most states do not restrict the the amount of retainage that can be contractually withheld from your contractor. This includes both residential and commercial work sites. The custom in the industry is to hold back around 5-10% of the total contractual amount.

What happens if you refuse to pay a contractor?
A contractor has the ability to place a mechanic's lien on your property if they are not paid. Thus, a payment bond provides significant protection as that would eliminate the need for a mechanic's lien.

How Payment Bonds Work on Construction Projects

Construction projects often involve a large number of subcontractors and suppliers. To ensure that all parties get paid, many construction companies will require a payment bond from the general contractor before any work begins. A payment bond is different than other types of bonds because it ensures that subcontractors and material suppliers are paid according to contract. This means they are critical for jobs on public property where mechanic's liens (or other types of security interests) cannot be used.

Construction Payment Bonds vs Performance Bonds

Construction payment bonds are a type of surety bond designed to ensure subcontractors and material suppliers get paid according to contract. Because they provide protection against the risk that one party will not be able to pay, performance bonds can also serve as construction payment bonds. A few key differences between them include:

  • Performance bonds may have higher premiums than just a payment bond (although they are usually part of the same package)
  • Performance bonds require the contractor to provide a surety bond, which is collateral for repayment in case of default
  • Construction payment bonds are usually issued by private businesses and not government agencies. They also have lower premiums than performance bonds because they do not carry the financial risk associated with providing collateral.

Construction Payment Bonds vs Product Supplier Bonds

Payment bonds include both payment to subcontractors as well as material (product) suppliers.

What is a Payment Bond for Subcontractors?

A subcontractor is a person or company that has contracted with another to provide labor, services, and/or materials for the completion of a construction project. The payment bond protects them so that they get paid (and don't put a mechanic's lien on the property).

Why Payment Bonds are Required For Construction Projects

Payment bonds ensure subcontractors and material suppliers get paid according to contract. They have unique standing in the world of construction because they can be used on public projects to keep the construction moving and not bogged down in legal disputes.

Guide to Understanding Payment Bond Claims

Payment bond claims can be complicated to understand. A claim is the right of a subcontractor or supplier that has been paid less than they are owed on an unpaid contract. The following steps will help you better understand how payment bonds work and what rights your subcontractors/suppliers have when it comes time for them to file a claim:

  1. Was the work done properly and timely?
  2. Was the claim submitted timely?
  3. Is there a dispute with regard to the quality of the work?
  4. Does the payment bond cover the claim being made?

Conclusion

Payment bonds ensure a contractor's subcontractors, material suppliers and laborers are protected. Without this protection these individuals could be left with unpaid wages or other debts if the project they were working on was cancelled for some reason.

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