Are You Having Trouble Getting Bids on Jobs? If So, You Might Need a Payment and Performance Bond!
A payment bond is a surety bond issued to contractors by a surety (like an insurance company) guaranteeing the parties involved in a project will get paid and are protected from non-payment. These bonds can either be conditional or unconditional. Unconditional payment bonds give owners full protection from having a lien placed on their property. Conditional bonds give owners limited protection, as liens can be placed on their property, but the owner then has a limited amount of time to transfer the lien from the property to the surety. Payment bonds are typically issued simultaneously with performance bonds as performance bonds promise that a project will be completed as agreed upon. This includes being finished by the completion date, assuring compliance with the jurisdiction’s applicable laws and regulations, and assuring completion in accordance with the terms of the contract.
Per the Little Miller Act, bonds are required for prime contractors on federal contracts of $100,000 or more. Nearly all state contracts have similar requirements, regulated by each state’s “Little Miller Act”, to ensure that first and second tier subcontractors, suppliers, and laborers have recourse for recovery if they are not paid. Even if you are not required to furnish a bond, it is a good idea to do so.
To get a bond, contractors must apply to a surety for a letter of bondability. This letter states the monetary limits that the surety would be willing to provide to bond the contractor. Payment bonds can be costly, and the price will depend upon your background, credit, financial strength, and dollar value of the contract award. Smaller projects might require only good credit and a clean record, whereas larger projects may require financial statements, balance sheets, and prior years’ tax returns. Generally, the price is 1-4% of the total bond amount.
These bonds give subcontractors and suppliers a sense of security that they will get paid, and the bond may give the owner relief because the bonds can guarantee that the project will be completed as contracted for, on the date it was to be completed. Overall, payment and performance bonds are important to show that one is a responsible general contractor.