When you first start to bid on and win larger construction projects, the surety bonds required can be confusing.
In this short post we'll look at the payment bond including:
- What the payment bond is
- Who the payment bond protects
- How pricing works in relation to the performance bond
- And how you can get started today with your own bond program
What is a Construction Payment Surety Bond?
A construction payment surety bond is almost always required alongside the bid bond and the performance bond.
Make sure you read our post on the construction bid bond, but at a high level the bid bond is required to protect a project owner from a contractor that wins the project but then declines to take the project.
The performance bond protects the project owner from the contractor not completing the project or from cutting corners to get the project done.
The payment bond protects the project owner (indirectly), subcontractors and suppliers from a contractor that fails to pay for:
- Subcontractors
- Building materials
- Supplies and equipment
Bottom line, any expense that is required by a third party to get the project done, the project owner has access to this money to pay off unpaid bills.
Why the Performance Bond and Payment Bond Are Two Different Bonds
As you'll see in the next section, when you purchase the performance and payment bond, you do so as a package. But they are two distinct surety bonds.
But if a contractor refused to pay subcontractors or refused to pay for materials, they are likely running into cash flow issues that will cause the project to fall behind .
It is likely in these situations the contractor could activate both the performance bond and payment bond.
The project owner is responsible for making a claim on the performance bond.
And the subcontractors and/or suppliers who have not been paid are responsible for making a claim on the payment bond.
And this is why the performance and payment bonds are two distinct surety bonds. They are used by different parties.
So as you can see the payment bond is direct protection for the subcontractors and supplies because they have to make any claims themselves.
But it also indirectly protects the project owner because when the payment bond is present, subcontractors and suppliers must use the payment bond for financial recourse. They cannot shift that responsibility to the project owner.
Getting a Payment Bond Issued for a Project
At a high level here's how the process works.
When you have a construction project you're interested in bidding on, you would get a bid bond.
Getting Pre-Approved For The Performance and Payment Bond
During this process you get pre-approved for the performance and payment bond. If you're working with a company that does not pre-approve you, that is a huge risk.
If you win a bid and then try to get approved for a performance and payment bond, you may get rejected. If that is the case the bid bond would be activated and you could lose the project.
The Performance and Payment Bond Bundle
While the performance and payment bonds are two separate bonds, they are purchased together at the cost of 3% of the project amount (which is your winning bid amount).
Now, if you have completed similar projects in the past and you have strong business financials, we might be able to get that rate lowered.
But typically, most contractors will work this cost into the final bid. You can do this by taking your final bid for the project and dividing that by 0.97.
Once the project is officially completed, the project owner will provide a release or obligation and all bonds are no longer active.
Getting Setup With a Construction Bond Program
If you're an emerging construction company or you've successfully completed a few projects, you can get pre-approved for construction bond financial limit.
We are Surety Bonds Direct and as your construction bond producer, we can get you pre-approved up to $3 million in available construction bonding capacity.
Keep in mind this does not mean you need to request that level of available bond coverage. You can request $500,000 or $1 million. The goal is to choose a limit that fits your business.
But with this pre-approval, you're able to bid on projects knowing on a financial level, you're already approved to have your bid, performance and payment bonds issued.
Learn more about what construction bond capacity is all about and request your pre-approval today. There is no cost and again, it only takes a soft credit check of the business ownership to get this approval issued.
Ready to Get Your Construction Bond Pre-Approval Or Payment Bond?
If you're actively bidding on projects, we want to be your surety bond partner and help increase your company's capacity to take on more projects.
Or maybe you're just getting started and you need to get your pre-approval completed so you can bid on projects with confidence, we are ready to help you too.
Complete a quote request form and just tell us about your business and project. We will contact you and get the information needed.
You can also call a construction bond specialist at 1-800-608-9950 and speak with a real human today.
