What are Payment Bonds?
In the event the bonded principal fails to pay for staffing services and materials Payment Bonds ensure that suppliers and subcontractors get paid for such project expenses. Laborers or suppliers with the right to make a claim against a payment bond is referred to as a “Claimant.” A proper Claimant under a payment bond is typically restricted or limited by the bond, a statute, or the contract.
How do Payment Bonds work?
The vast majority of payment bonds require a Claimant that has not executed a contract with the principal, to give the principal or surety, written notice of its Claim with a specific deadline after providing the labor or materials for which the Claim is being made. Meeting these deadlines is critically important for the bond or any statutes governing the bond. Otherwise, the Claimant may lose the rights per the bond.
Types of Payment Bonds
The Payment Bond is part of the Contract Bonds which are divided in:
• Bid Bonds
• Performance Bonds
• Payment Bonds
• Maintenance Bonds
How much do Payment Bonds cost?
Contractors can expect the rate to range between 2% and 3% of the value of the contract. Adjustments to the bond premiums are typically present, based on the final contract price. If price increases, the premium does to; and if it decreases, so does the premium. Contractors must include the cost of the bond in every proposal and change order, regardless of the total amount because bond premiums are usually reimbursed. Several small change orders may eventually turn into a large increase in the contract amount, thus resulting in an increase of the premium. Contractors want to avoid the premium to come from the profit.
Payment Bonds in Construction
Payment Bonds are part of Contract Bonds and are often required along with performance bonds.
How can I get a Payment Bond?
First, contact a professional surety bond producer and start building that relationship. Bond producers are business professionals with expertise in providing surety bonds for contractors, subcontractors, and other construction project participants. They are highly knowledgeable about the surety and construction markets and focus their main activities on surety markets and position construction firms for them to qualify for surety credit.
Bond producers offer invaluable business advice to assist contractors in securing its surety credit relationship, and improving surety credit, when needed.
They gather information and documentation from contractors as required by the surety in order to evaluate a request for bonding. Having a successful relationship between contractor and the surety company is key. Developing and maintaining this relationship of trust, commitment, respect, and teamwork is a must when aiming to make full use of surety bonds.
If I am not approved to get a Bond, what options do I have?
In the case that your company does not fill the requirements to get a Bond or you need to increase your bond capacity, you can look for the following options:
- SBA Surety Guarantee Program
- Funds Disbursement Programs
- Collateral
- Joint Venture/Mentor Protégé
- Small Contractor Development Programs
What is a Collateral Bond?
A Collateral Bond is when you borrow money with the borrower offering an asset or a property as a security measure for the lender.
If the borrower fails to pay the debt on time, the lender acquires the asset or property that the borrower set as collateral.
What are the factors the underwriter will consider for your bond?
The underwriter will verify your 3 C’s
Character
o Integrity
o Reputation
o Relationships
o References
o Indemnity
Capacity
o Financial Statements
o Working Capital
o Work-in-Progress
Capital
o People
o Experience
o Equipment
o Business Plan
o Continuity
When are payment bonds released?
Upon completion of the Contract and when any warranty or maintenance period has passed, the performance bond’s obligation is then finished. Typically, a surety bond underwriter will send Contract Status Report requests to the Obligee. It is not necessary to get the performance bond back from the Obligee or close it out.
Do Payment Bonds expire?
Notwithstanding the fact that not all surety bonds are created equal and the duration of surety bonds can vary wildly from one to the next, most surety bonds have indeed an expiration date. There may be a payment bond that lasts two years, a performance bond with a one-year expiration date, or a range of other deadlines for any of them.
