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5 Things You Need To Know About Payment Bonds

A payment bond is a legal assurance that all subcontractors, material suppliers and all entities involved in a construction project will be paid for their work, according to their contract. To understand these bonds better, it is important to know how they work, who is protected, how much payment bonds can cost, why they are so important, and what a payment bond claim can entail. Read on for more useful information on payment bonds.

How Does A Payment Bond Work?

As many construction projects involve a large number of subcontractors and suppliers, it is common that a construction company will require a payment bond from the general contractor before the work begins. A payment surety bond is a legal contract that guarantees certain employees, subcontractors, and suppliers are protected against non-payment. This bond provides a legal assurance that every worker will be paid as per their contract. Even if you are not required to provide a payment bond, it is a good idea to do so. This will draw better quality subcontractors to your project and give your project more credibility.

These bonds are required of prime contractors on all federal contracts totaling $100,000 or more, per the Miller Act. Some payment bonds will not expire, but many will require renewal twelve months after purchase.

Who Is Protected?

Payment bonds protect a contractor’s subcontractors, material suppliers, and laborers. Essentially, anyone who has been involved in the building of a project is protected from being left without any payment at all in the event something goes wrong with the project. Without this protection, these workers could be left with unpaid wages or other debts if the construction project they are working on is canceled for any reason. However, fortunately, it is unlikely to find a construction project completely shut down.

The Miller Act protects subcontractors, suppliers, and laborers in addition to those who work with a contractor. To do so it requires contractors to purchase payment bonds on most state projects.

How Much Does A Payment Bond Cost?

The cost of a payment bond depends on several factors, including the type of contract and the risk of the contractor. Typically, a payment bond will be around 1 – 3% of the total contract amount. So, for a $100,000 contract, the payment bond will cost roughly $3,000. 

Why They Are So Important

A payment bond is different from other types of bonds because it ensures that subcontractors and material suppliers are paid according to the contract. Payment bonds are critical for work on public property where mechanic’s liens, or other types of security interests, cannot be used. A mechanic’s lien is a guarantee of payment to builders, contractors, and construction firms that build or repair structures on personal property.

According to the experts at Swift Bonds, payment bonds “have a unique standing in the world of construction because they can be used on public projects to keep the construction moving and not bogged down in legal disputes.”

Payment Bond Claims

Making a payment bond claim is the legal right of a subcontractor or supplier that has been paid less than they are owed on an unpaid contract.

There are strict timing regulations on filing a payment bond claim. As stated by the American Bar Association, a civil action against the payment bond by any claimant cannot be filed until 90 days after the last day of furnishing labor or materials.  Moreover, any civil action brought under the Miller Act must be filed within one year of the last day of the claimant’s furnishing labor or materials. These timing requirements must be strictly followed, as failure to comply with them can be fatal to the claim.

Subcontractors and suppliers should consider the following before making a claim: Was the work done properly and in a timely manner? Is there a dispute with regard to the quality of the work? And does the payment bond cover the claim being made?

Payment Bond Claims

This has been a very brief and simple guide to payment bonds. Miller Act payment bonds provide a powerful legal payment enforcement mechanism for qualified subcontractors and suppliers on construction projects.

The most important takeaways from this guide to payment bonds are that payment bonds are highly recommended protection for workers, even on projects that do not specifically require them, they are vital for public property work, and that if you want to file a payment bond claim, it is vital to ensure that you are within the timing regulations. For more information on payment bonds, it is wise to consult with experts in the field – you should contact a bonds company for further details.

Allen Brown
Allen Brown
Allen Brown is a versatile author passionate about writing about the latest trends. With a keen interest in exploring the latest advancements in technology, Allen loves to write about various topics, from artificial intelligence and cybersecurity to software development, Home Improvement, Business, Digital Marketing and more.

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