Contract Payment Bonds

What is a Payment Bond?

Why Are Construction Payment Bonds Required?

Medium to large construction projects require a lot of coordination and teamwork to complete.

According to Nationwide Insurance it takes an average of 22 subcontractors to build a personal residence from scratch.

For medium to large commercial projects this number can be the same but the scope of the work will be much larger.

It's imperative for the general contractors to hit their timelines, budgets, and design goals.

And the subcontractors and suppliers want to know they will be paid from the project financing.

It's entirely possible that a project gets scrapped or delayed causing a subcontractor to not get paid for their work.

Public Works Projects

Cities that commission contractors for public works projects legally require a payment bond for any project valued over $100,000 according to the Miller Act and Tiny Miller Act.

The Tiny Miller Act is a name given to the local requirements for this payment bond requirement. Each state will have additional bonding requirements and amounts unique to them.

The reason payment bonds are legally required for public works projects is because a subcontractor cannot put a lien on public or city property if they are not paid.

This would leave them without any protection and it's why state, county, and municipal governments legally require payment bonds over a specified project size.

Bottom line, the surety bonds involved in a construction project, including the payment bond, are the primary way project owners, subcontractors, and suppliers hold contractors accountable.

What Is The Payment Bond Amount?

Just like the performance bond, the payment bond amount is typically equal to the size or the budget of the project.

This extends full projection for the subcontractor's services in the event they are not paid or partially paid.

It's important to know the performance bond and the payment bond are two different bonds even though they have the same amount and they are typically purchased together.

How Much Does a Construction Payment Bond Cost?

When you're bidding on a project, you typically have to start with a bid bond.

And in most cases during the bid bond process, you'll get qualified for a performance and payment bond.

The good news is, when you work with a specialized surety agency like Surety Bonds Direct and purchase your performance bond, you also get the payment bond at no additional cost.

Here's how the price is determined.

The price of construction surety bond is going to be based on a rate quoted from a surety.

A surety is the insurance company that underwrites bonds in the construction space.

This rate is based on a number of different criteria. Let's take a look at the high level process to get approved.

Step 1 - Credit Check And Contractor Application

All owners of the business will need to have a credit check completed.

There is also an application where you'll have to detail the scope of the project and a brief history of your company's contractor history in terms of project size.

Step 2 - Personal And Business Financials (Conditional)

The surety may require person financial statements of the owner and the business depending on the:

• Credit history of the owners
• Scope of the project
• And your companies history with projects of the specified size you're currently bidding on

The good news is in most cases these financials can be prepared in-house in most cases.

Step 3 - Construction Bond History

The more information you can provide about your construction bond history the better.

This is mostly covered in the application but it's a major factor with how the surety will price the bond amount you require. Provide a full history focused on how you've successfully handled increases in project size.

Step 4 - Conditional Required Collateral

In rare cases based on all of the steps above, the surety may require collateral to issue the bond.

In most cases the collateral is going to be anywhere from 8% to 10% of the bond amount. But if credit and construction history are an issue, it can reach upwards of 30%.

Construction Performance Bond Example Pricing

Based on all of these criteria, the surety will quote a rate.

And remember this process will be mainly focused on the performance bond. We can roll the payment bond into the cost of the performance bond.

Read our performance bond page to see a full example or pricing.

How Long Does It Take To Get a Construction Performance And Payment Bond?

It only takes about 1 to 2 business days as long as you have the necessary owner and business information along with the project scope.

Based on the initial application the surety may come back with additional requests for information like a request for financials or collateral. So it's a good idea to be prepared for these requests, even if you don't have to fulfill them.

Once you receive your rate and you agree to the price, purchasing your construction bonds simply requires completing an online order form.

What Happens After You Purchase Your Contractor Bond?

Once you purchase your bonds, our issuance team will work with the surety and prepare your bond with the:

• The correct bond forms
• Required signatures and seals
• The required power of attorney

Every project is unique in how they require proof of being bonded.

Some projects will accept a copy of the bond. This means we can email it to you, speeding the process up.

Other projects required the original bond. This means we'll need to mail you a copy of the bond.

Once you receive your bond, you can provide it in your contractor package and bid package. If you need anything else from us, just let us know.

How Long Do Construction Performance Bonds Last?

Construction bonds must remain active for the life of the project. This includes the performance and payment bond.

If your project lasts over a 12 month period from when your payment bond becomes active, you will need to renew the bond for an additional 12 month term.

As your bond renewal date approaches, your specialist will contact you to see if you need to renew your bond for another year. Plus they'll have renewal pricing ready to go, making the process seamless.

What If You Required Additional Construction Bonds?

As you'll discover, there are many construction surety bond requirements depending on your project.

The core three are the:

• Bid bond to ensure your bid is serious and you're vetted to take on the project
• Performance bond to ensure you complete the project according to the contract
• Payment bond to ensure you pay your subcontractors and suppliers

Click above to learn the details about each.

And remember, the process to get qualified and purchase these bonds happens all at once.

So start by filling out our online quote form and tell us about your project including the bond amounts and project value.

You can always contact a bond specialist directly by calling 1-800-608-9950 and they will help you get through the process so you can get the information you need fast.