Your Guide to Payment Bonds
What is a payment bond? Payment bonds are surety bonds that ensure subcontractors and material suppliers are paid according to contract. These bonds are critical for jobs on public property where mechanic’s liens (security interests) cannot be used.
When do you need a payment bond? Payment bonds are typically used in conjunction with performance bonds and are oftentimes even on the same bond form. Contractors purchase payment bonds when negotiating a construction contract to reassure those working with them that they will be paid appropriately and on time.
How Much Does a Payment Bond Cost?
Payment bond rates typically fall around 3%, which would translate to a $3,000 premium for $100,000 of coverage. The best way to determine exactly what your premium will be is to get a free surety bond price quote with no obligation.
Payment Bond Rates
When working with SuretyBonds.com, you get the lowest rate available without any additional brokerage fees. The rate you’ll pay is subject to:
- the size of the job at hand and its contractual terms
- the amount of bonding coverage required
- the principal contractor’s work record
- the principal contractor’s credit score
- the principal contractor’s other financial credentials
Note:To qualify for our construction bonding program, applicants must have a credit score at or above 700. SuretyBonds.com can offer $250,000 of single job limit bonding coverage or $500,000 of aggregate limit bonding coverage.
SuretyBonds.com is legally licensed to issue payment bonds nationwide.
Learn More About Payment Bonds
The Federal Miller Act requires that surety bonds be used on all publicly funded projects that exceed $100,000. 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. As such, surety bonds essentially take the place of mechanic’s liens when contractors/subcontractors work on public property.
Each bond that’s issued binds three entities together.
- The obligee is the project owner requiring the bond to ensure the general contractor pays subcontractors and material suppliers appropriately.
- The principal is the contractor who purchases the bond as a guarantee that subcontractors and material suppliers will be paid.
- The surety is the underwriter that issues the bond, thus guaranteeing that subcontractors and material suppliers will be paid.
If there is a claim on the bond due to nonpayment or other contractual breach, the subcontractor (or other wronged party) files a claim on the bond. If the claim is found to be valid, the surety that issued the bond will make sure the wronged party is in some way compensated for their loss.
As a type of contract bond, payment bonds are riskier for underwriters to issue than standard commercial bonds. As such, payment surety bonds can be more difficult to qualify for — especially when applicants have a poor work history, a low credit score or other financial problems.