A payment bond is posted by a contractor in order to guarantee that its subcontractors, laborers and material suppliers on the job will be paid. The payment bond is often written in conjunction with a performance bond, but in some cases can be written on its own. Whereas a performance bond has one Obligee, a payment bond could have many Obligees including suppliers, laborers and 2nd and 3rd tier subs or suppliers. The payment bond is issued by a bonding company, also referred to as the surety, on behalf of a contractor. It is there to make sure all covered vendors are paid, but vendors must follow all statutes when making a claim or it could be denied.
The limit of liability on the payment bond is typically 100% of the contract amount. If there’s a claim, the surety can deny the claim on certain grounds, elect to complete the remaining portion of the contract or they can simply pay the damages to the project owner, up to the penal sum of the bond, whichever is cheaper. It’s never a good practice for the surety to just pay the claim without investigating, since it’s ultimately the contractor that will have to pay.
A payment bond is NOT an insurance policy. If the surety pays a payment bond claim they’ll look to the contractor for reimbursement. This can be confusing because it’s usually a large insurance company that acts as the surety, but it’s really a lot more like getting a line of credit at a bank than getting insurance. You’ll sometimes hear that a contractor has a “Surety Line of Credit” which means they have an established program that allows them to bond a certain amount of work.
Although the contractor is responsible for posting the bond, the payment bond is written to the benefit of the owner to protect them against liens filed on the project along with other obligees such as the materials suppliers, laborers, and subcontractors. On federal jobs, liens can’t be filed, so the payment bond is the only defense for unpaid vendors.
Payment bonds are not always required. In many cases if it’s a private entity that’s contracting the work, it is up to them to determine if they’ll require the contractor to provide a payment bond, performance bond, or both. If it’s public entity soliciting the work, then per the Miller Act of 1932 and other subsequent legislation, payment bonds are required on bonds exceeding $25,000 with few exceptions. In the case of federal construction projects, the Federal Acquisition Regulation (FAR) Part 28 requires performance bonds only on contracts that exceed $25,000
Can Baldwin Cox Allen help with payment bonds?
We can absolutely help! Baldwin Cox Allen has been specializing in performance bonds for contractors since we opened our doors in 1989. We have access to over 30 well established, “A” rated and Treasury Listed sureties and we’ll search the market for the right fit for your unique needs. We’ll work hard to get the bonds approved for you, and then continue to work to improve your program and maximize your bonding capacity!