What Is A Payment Bond For Contractors?

Everyone appreciates getting paid for the work that they do, but rarely do employers have to take out a special type of bond just to guarantee that they’ll pay their employees, subcontractors, and suppliers.

Unfortunately, construction companies are the exception to the rule, at least if they are looking to win government contract bids or any other projects where a “payment bond” is required.

A payment bond is one of the types of surety bonds that most government projects require of all the contractors who bid on their projects. Surety bonds are also becoming more popular on commercial projects and include bid bonds, performance bonds, and, of course, payment bonds (also referred to as labor & material bonds).

A payment bond is simply a guarantee that a construction company will pay its employees, subcontractors, and suppliers throughout a construction project. The project owner, or person hiring the contractor, will indemnify themselves through this type of surety bond in-case they become liable for unpaid employees, subcontractor or suppliers.

For large-scale projects, a construction company will have to invest a significant amount of money to purchase materials and pay subcontractors for their work. Sometimes, projects can last years, draining a construction company of funds. If they become unable to afford materials or pay their subcontractors in the middle of the project, the supplies could dry up, and the subcontractors could walk away. This would leave the client in a bind.

This is the reason why payments bonds go hand-in-hand with performance bonds, which guarantee that the construction company will perform the work according to their bid. Once a project bid is won, the winning construction company will be expected to post both a payment and a performance bond. This bond is guaranteed by a surety company that specializes in guaranteeing bonds.

A surety bond, including a payment bond, has a lot in common with a loan. A construction company must prove that they have the financial means to cover the bond before being approved by their surety company. If the client makes a claim against the bond, the insurance surety will pay the cost and then turn around and collect the money from the construction company.

In other words, as long as you have a clear means to pay your employees, subcontractors, and suppliers, you should be able to qualify for a payment bond, which will allow you to bid on a much wider range of construction projects.

As Fusco & Orsini Insurance Services, we specialize in helping our clients apply and qualify for surety bonds at the best rates possible. If you’d like to explore the possibility of getting a bond (most construction companies start with smaller bond amounts), we’d be glad to help. We can also answer any questions you have about the process.

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