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Payment Bond
What is a Payment Bond?
A Payment Bond is a surety bond that guarantees all participants on a project or contract will be paid. Payment bonds are most commonly used on construction projects and are almost always issued with a Performance Bond. Together, payment and performance bonds are referred to as P & P Bonds, a Construction Bond or a Contract Bond.
In terms of construction, a payment bond guarantees the contractor will rightfully pay all of the related suppliers, subcontractors, and laborers used on a project. Project owners gain protection when they require a payment bond to ensure the project is left lien-free upon completion. Likewise, contractors also can be protected when requiring subcontractor payment bonds from having to pay again for unpaid sub-subcontractors or sub’s suppliers.
These bonds, like all surety bonds, are a written guaranty involving these three parties:
Principal: the person whose payment is being guaranteed and the one posting the bond.
Obligee: the person or entity that is requiring the bond and is therefore protected by the bond, i.e. a project owner.
Surety: the entity (almost always a licensed and A.M. Best-rated insurance company) that issues the bond and guarantees the payment by the Principal. So if the Principal defaults or does not pay to the standards of the contract then the Surety will be called to step in to compensate for the non-payment.
The cost of a Payment Bond is generally the same as the cost of a Performance Bond in that Payment Bonds are rarely ever issued without a Performance Bond. Due to the associated risk from the perspective of the bonding company, Payment Bonds can be very carefully underwritten. Part of the cost of this bond will be the time and effort needed to provide the documentation and information the bonding company will need.
The actual price paid for a Payment Bond varies. In most cases, the bond will be required to cover 100% of the contract amount. In some situations, the Obligee may even require the bond to cover up to 115%-120% of the total contract amount, and in others, it may be a percentage of the contract amount.
The cost/premium charged for a Payment Bond is almost always charged as a percentage of the overall contract amount or bond amount. When a Payment Bond and a Performance Bond are issued together the price will be the same as if only one bond is being purchased. It can be said that if a Performance Bond is purchased then the Payment Bond is included for free.
As Payment bonds can cover such a vast array of underlying obligations and risks, it’s difficult to determine what the costs may be without having more information on the obligation.
Being that the bond is protecting the Obligee, it is best practice for contractors to include the cost of the bond in their estimate of the project where it will be paid for by the Obligee.
Contact our surety experts for a determination of costs for the bonds on a particular project.
Credit, Capacity, and Character are the three (3) C’s sureties use to determine bondability and bond rates. Details that are considered are:
Financial strength and experience.
Type of work and the size of the project.
Good information: The better the information a contractor can provide the surety company to demonstrate experience and financial stability, the easier it will be for the surety company to bond the contractor and provide the best rates available.
The stronger the experience and financial strength the lower the rate will be.
Depending on the size and complexity of the bond needs, it is important to know that it may take some time when establishing a new bonding relationship. In some cases, your Payment bond request may be handled and approved the very same day. In other cases, more information and data may be needed for the benefit of all the parties involved in the bonded agreement in order to move things forward.
As a seasoned surety bond-only agency, The ProSure Group has streamlined this bonding process and enjoys the support and great relationships of many of the finest surety insurance companies in the world. In addition to our experience, we have:
Specialized programs for many industries and classes
In-house underwriting and authority
Over 23 years in business of building very solid relationships with over 30 surety insurance carriers
All of these features allow us to respond quickly to a bond applicant’s needs with a viewpoint from an extremely large and diverse cross-section of the surety industry
Due to the nature of the surety relationship, Bond applicants must be willing to be transparent and willing to submit private information when applying for a payment bond, especially for large projects. Depending on the bonded obligation, this information may be required.
Personal credit information, personal financial information, company ownership information, project contracts, a work in progress (WIP) schedule, and business financials.
Applicants must also be prepared to sign a general indemnity agreement (GIA) when they have been accepted by a surety. A GIA is a contract between the bond applicant (principal on the bond) and the surety company that guarantees the principal will compensate the surety, using both corporate and personal assets, for any expense or loss the surety incurs due to bonds issued on behalf of the principal. This is standard practice and is a requirement no matter what surety company writes the bond. It’s a common viewpoint in the surety’s eyes if a business owner isn't willing to indemnify (back) their business then the surety should not be willing to either.
If a contractor is performing work on a project for the Federal Government with a contract value of $150,000 or more, they are required to post a payment bond by law. That law is the Miller Act of 1935, which was passed to protect taxpayers and subcontractors and suppliers from contractor default or non-payment. At the state level, each state has adopted its own version of this act, known as Little Miller Acts. Therefore, state-sponsored projects may require payment bonds for projects with contract values less than $150,000.
Private project owners may require bonds to protect their investment and see payment bonds as a vote of confidence from a third party that a contractor is stable and capable of fulfilling certain work. General Contractors or Prime Contractors often times require Payment Bonds from their subcontractors, as well. These are typically known as Subcontractor Bonds.
A Payment Bond is required by a project owner, known as an Obligee. They are normally requested by governments, local, state, and federal, governmental agencies, private project owners, and in the case of subcontractors, many prime contractors. The Obligee requires the bond because they want a guarantee that the suppliers, subcontractors, and laborers on a project will be paid in full and on time. An Obligee will also require a bond so they know a contractor is capable of paying for work and supplies on such a project because an unbiased entity has reviewed the contractor’s experience and financial standing and has concluded that contractor is fit to provide such payment.
In many cases, the Obligee will provide the bond form in a package with the contract. It is very important to review this document because not all surety bond forms are the same. The ProSure Group recommends, if possible, to use an AIA A312-2010 Payment Bond. The American Institute of Architects (AIA) collaborated with members from various industry groups including contractors, attorneys, surety bond producers, engineers, and insurance agents to provide this bond form as an industry standard, representing fair and balanced interests for all users.
As surety bond experts in business for over 23 years in Florida, The ProSure Group has issued many thousands of Payment Bonds and has partnerships with more than 30 different surety companies. From day one, The ProSure Group has specialized in providing surety bonds for the construction industry. This ensures that we match you with the best surety to fit you along with the best, most competitive pricing and terms available in the marketplace. Not only can we provide you with all of your bonding needs at low prices, but we can also say that with our assistance we can help you increase your bonding capacity and in turn help you grow your business. If you have any questions please do not hesitate to call us at our toll-free number 1-800-480-3883.
The ProSure Group has bond programs for contractors of all sizes and experience. Whether you need a bond for a few thousand dollars or for $10+ Million, we have the connections and relationships to bond your project. For smaller contractors we have Express Bond Programs available for quick and easy bonding that only requires a signed application and credit check. For larger contracts ($500,000+), more information will be required, See below.
