Contractor Payment Bonds
Contractor payment bonds are an important part of the construction industry, as they help to protect subcontractors and suppliers from non-payment. They also help to ensure that construction projects are completed on time and within budget. Merchants Bonding Company’s surety-only focus and common-sense underwriting philosophy make us a leading source to fulfill contractors’ bonding needs.
What's a Payment Bond?
A payment bond is a type of surety bond that guarantees all entities involved with the construction project will be paid. This includes subcontractors, suppliers, and laborers. The bond is typically required by the owner of the project, and is issued by a surety company.
How Do You Get a Payment Bond?
Surety bonds are issued by Merchants Bonding Company (Mutual) through insurance agents. If contractors don’t have an agent, they can use a tool like Merchants’ Find an Agent. The agent will guide the contractor through the process, informing them about documents and information needed by the surety to underwrite the bond.
How is the Bond Size Determined?
The size of the bond is typically equal either to the contract value, or a percentage of the contract value. The bond is in effect for the entire duration of the construction project, and won’t be released until all parties have been paid in full.
What Happens if a Contractor Violates the Bond Terms?
If a contractor fails to pay a subcontractor or supplier, the subcontractor or supplier can file a claim against the payment bond. The surety company will then investigate the claim and, if it is found to be valid, will pay the subcontractor or supplier the amount owed. The contractor, per the indemnity agreement, is then obligated to pay back the surety company for the amount of the claim.
Why are Payment Bonds Necessary?
Surety bonds protect on many levels. Payment bonds provide a financial safety net for subcontractors and suppliers – ensuring they get paid, can help prevent liens and other legal disputes that delay project completions, and serve as a risk mitigation tool for project owners.
Key Features of a Contractor Payment Bond
- It guarantees that all entities involved with the construction project will be paid.
- The size of the bond is typically equal to the contact value, or a percentage of the contract value.
- The bond is in effect for the duration of the construction project.
- If a contractor fails to pay a subcontractor or supplier, the subcontractor or supplier can file a claim against the payment bond. The surety company will then investigate the claim, and if it is found to be valid, will pay the subcontractor or supplier the amount owed.
What is a Surety Bond?
A surety bond is a three-party agreement that ensures the fulfillment of a commitment or contract. For instance, the surety (Merchants Bonding Company (Mutual)) may provide a surety bond to a construction company (the principal) which is required by the state (the obligee), ensuring the construction company will perform the duties as outlined in the contract. In bonding the construction company, Merchants assumes the risk should the company default or not fulfill their contract. A surety bond is different from traditional insurance in that the principal is obligated to pay back the surety company on any claims paid out.