What is a Payment Bond?
Payment Bond Definition: Typically required in conjunction with performance bonds, payment bonds are contract bonds that guarantee subcontractors and material suppliers will be paid.
The parties that make up the payment bond agreement are the principal (contractor), the obligee (the project owner) and the surety bond company providing the bond.
While the sides receiving compensation in the case of a payment bond claim are subcontractors, suppliers and laborers, it is the project owner who is the obligee, because they are the ones who need protection against claims by those parties in the case of contractor default.
If, for some reason, a contractor doesn’t pay those parties within a reasonable timeframe, a claim can be made against the bond. The surety who issued the bond then steps in and takes care of all pending financial obligations of a contractor towards those parties.
Payment bonds are usually submitted to obligees alongside performance bonds, which is why it is common to refer to them together as a ‘performance and payment bond’.
Payment and Performance Bond
It is customary to issue a performance and a payment bond together, as they are usually complementary. Performance bonds guarantee that the the project and the other in relation to other parties involved, such as subcontractors.
Furthermore, all publicly funded projects are bound by the Miller Act to have both payment and performance bonds in place on contracts that exceed $150,000.
According to the Miller Act, the sides who have a right to a claim on a payment bond are:
- all first-tier subcontractors, suppliers and laborers to the general contractor, and
- all second-tier subcontractors, suppliers and laborers who have a direct contract with a first-tier subcontractor.
Payment Bond Cost
Payment bond cost is determined by the size of the construction job and the terms of the contract. For example, a payment bond on a $200,000 contract will have to cover this sum. What you, the contractor, will pay is only a fraction of that total amount, a so-called premium, which is usually between 1%-3% of the total bond amount.
How high your premium will be is mostly determined on the basis of your personal credit score for bonds under $450,000. Your business’s overall health, financial standing as well as your personal industry experience are also taken into account when determining your payment bond rate for larger bonds.
Avoiding Payment Bond Claims
Contractors should always try to avoid claims on their payment and performance bond. If you are having trouble paying subcontractors, suppliers or laborers a claim can be made against your payment bond. If the claim is found to be legitimate, the surety will have to step in and pay any outstanding amounts to these parties. Any money that is paid by the surety will then have to be repaid to the surety by you.
Bryant Surety Bonds works with a network of A-rated, T-listed surety bond companies who issue bonds at exclusive rates in all 50 states. By obtaining a bond through one of those companies you will be working with a stable and reliable partner.
For an initial estimate of the cost of your payment bond premium, use our surety bond cost calculator in the sidebar on the right. If you would like to know more on how surety bond cost is determined, our surety bond cost page can provide you with further information.
How to Get Your Payment Bond
To obtain your payment bond, go to our contract bond applications page and follow the instructions. You will have to submit a payment bond request form, along with a number of documents concerning the terms of the contract you are seeking to obtain a payment bond for and your business.
Call us at (866)-450-3412 if you have any questions regarding the application process or the documents you need to submit. Our surety bond experts will gladly assist you.