Payment bonds are a type of surety that gives specific guarantees to various people a contractor will work with or hire for a construction job. While it isn’t unusual for a contractor to get a payment bond for private projects, it is required by law on public construction jobs; meaning, anything funded by tax dollars no matter if it’s local, state, or federal.
It’s easy to make the mistake of thinking that it doesn’t matter where you get a payment bond, just get it and get the job done, but that is a missed opportunity that can cost you dollars as well as company growth.
Let’s discuss your options for getting a payment bond, but first, we’ll detail what it is so you better understand why where you get it matters.
What is a Payment Bond?
A payment bond provides a guarantee to subcontractors, laborers, and material suppliers that they will be paid according to the terms set out in the contract. If they aren’t paid what was agreed to, then they are entitled to make a claim against the bond to get the money owed. The contractor must then provide payments back to the surety for any money the surety paid out on the claim.
The payment bonds guarantee doesn’t protect the contractor that the bond is issued on behalf of, it benefits those hired. Since public property can’t be liened, the payment bond exists to provide payment protection to those working on a public project who don’t hold the agreement with the public entity. Payment bonds can also be required on private jobs to provide assurance to the owner of the job that the job will be completed free of liens. In short, a payment bond helps prevent people from being taken advantage of, as well as financial mishaps from affecting others who’ve done their job.
Bonding with an Insurance Agent
Many contractors first think of going to their insurance agent to get the bonds they need, and while an insurance agent can issue a payment bond, it isn’t the best choice. The primary reason an insurance agent is a subpar option for your bonding needs is that they lack the professional expertise that makes for a smooth bonding prequalification process. Remember, their professional area of expertise is insurance, not surety bonds. Also, because surety bonds aren’t their dedicated professional area, they lack the connections and relationships with surety companies that can help match a contractor to the right surety company, and they likely will not have access to specialized bond programs that can help the contractor.
This combination of a lack of knowledge regarding payment bonds and surety bonds in general, with the lack of relationships in the surety industry can lead to a surety application being denied. This could be the result of incorrect preparation or being paired with the wrong surety, often the case with younger contractor companies. It’s also important to note that even if approved, a lack of proper preparation can result in unnecessarily high premium costs for the bond.
To read more on the differences between a surety agent and an insurance agent, we strongly recommend you read here: The Difference Between a Surety Specialist and an Insurance Agent
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Payment Bond from a Surety Specialist
The other option you have to get a payment bond is from a surety expert, also known as a surety agent or specialist. The surety agent does exactly what the job title describes, exclusively handling surety bonds for contractors. Due to their professional dedication to a single industry, they have had the opportunity to know the nooks and crannies, develop important relationships with surety companies, and have the experience in bonding to help make the life of a contractor far easier when it comes to bonding. As an example, a surety expert would know construction-oriented CPAs that can ensure the financial documentation needed for getting a payment bond are in order and accurate.
As for what payment bond costs, a surety agent can guide you on how to lower your premium rates. This may seem counterproductive for the agent, but minimizing your business risk helps minimize the risk of a claim against the payment bond, which means everyone wins. The surety agent takes a keen interest in seeing your company grow and be successful. This is perhaps the greatest benefit of getting a bond from a surety agent.
It Matters Where You Get a Payment Bond
The decision for where you get a surety bond largely depends on how you see bonds figuring into your long-term goals. If it’s simply to get one required payment bond to work on the job, then it doesn’t matter too much. If, on the other hand, you think you’ll need to provide more payment bonds in the future, and want to use the payment bond as an opportunity to grow your bonding capacity and company, then a surety agent is the better choice.
We at CSBA are a group of professionals who’ve dedicated our careers to helping California contractors grow their companies and obtain the payment bonds they need. With over 225 years of experience, we are equipped to help both younger contractor companies and the more seasoned businesses tackle the road ahead for increasing bonding capacity, as well as the other bonds they may need. Between the key relationships we’ve cultivated, the expertise accumulated, and the top-tier service we provide, the bonding process with CSBA is a smooth one.
Make payment bonds work for you by working with the surety experts.
Get a payment bond quote now
We want to know more about how we can help your construction company get the right contractor bond for your next project.