Payment Bonds
What is a Payment Bond?
Payment bonds ensure that subcontractors and material suppliers are paid according to contract, which is critical for jobs on public property where mechanic’s liens cannot be used. These bonds are typically used in conjunction with performance bonds, oftentimes even on the same bond form. Contractors purchase them when negotiating a construction contract, but don’t worry if you don’t know much about them yet.
The federal Miller Act requires that surety bonds be used on all publicly funded projects that exceed $100,000. Project owners managing a job on private property might also choose to require surety bonds if they so desire. 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 breech, 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. Since the bonding process effectively brings a neutral third party in to execute the agreement, it provides a certain measure of reassurance to all involved with a project — particularly projects that involve a great deal of money.
To apply now, choose one of the following forms to get started:
If you have questions along the way, please don’t hesitate to contact us at (888) 488-BOND (2663)