Payment bonds

Surety bonds of all types play a critical role in making the construction industry work. Since most jobs are performed by private forms, it's critical that there is a certain level of faith on the part of consumers, state and local regulatory agencies, and subcontractors. Surety bonds are a good way to increase the comfort level of all parties and exist for a wide variety of functions, including reassuring homeowners that a job will be completed on time and according to contract, assuring that suppliers will be paid for work and material they supplied, and even making sure that federal construction projects are completed as the contract stipulates.

Payment bonds are a large part of the surety bond process for construction jobs. These bonds ensure that subcontractors will be paid according to the terms set forth in the contract, which can be critical for jobs on property which is not privately owned. Mechanic's liens, which ensure payment of outstanding debts upon sale of a property, can be placed on private property but not on public property. The payment bond essentially takes the place of a mechanic's lien when a contractor or subcontractor is working on a piece of public property. However, since surety bonds are required by federal law for all projects in excess of $100,000, many jobs on private property also involve a payment bond.

If there is a claim on the bond due to nonpayment or other contractual breech, the subcontractor (or other wronged party) files a claim on the bond. If the claim is found to be a valid one, the surety company who issued the bond will make sure that the wronged party is compensated in some way for their loss by the contractor who purchased the bond. Since this procedure effectively brings a neutral third party in to execute the agreement, it can provide a certain measure of reassurance to all involved with any project, particularly those involving lots of money.

The bond is purchased by the contractor during the contract negotiation phase of a construction job, and is generally bought from a surety bond company or, in rare cases, an insurance company (though surety bonds are not insurance and should not be mistaken for such). The rate and amount is subject to both the size of the job and the contractor's own credit rating and financial history. Should the contractor fail to qualify for a normal type bond, special subpar credit bonds can be purchased for a considerably larger premium.