Navigating the process to obtain a payment bond for a construction project can be overwhelming without the proper support. Part of our mission at CSBA is to help contractors understand the world of surety bonds so they can grow their business and win more projects. We’ll begin by discussing what payment bonds are and then the process for applying for one.
What is a Payment Bond for Construction?
A payment bond is a specific kind of surety bond that guarantees subcontractors, laborers, and material suppliers are paid according to the contract agreed to. You’ll see this as a condition for contractors working on public projects. General contractors sometimes require them from their subcontractors, and some private projects also require them.
Payment bonds differ from insurance in that it doesn’t protect you the contractor that purchases it. It is for the benefit of your subs, labor, and suppliers, so if you don’t pay them, they can claim on the bond. If your surety had to make a payment on your behalf, you would be required to reimburse your surety.
Payment bonds are often required along with performance bonds. When they are issued together, there is just one premium charged for both bonds based on the contract amount. In other words, you aren’t charged separately for each bond, which is important to know so you factor the cost properly into your bid.
The Benefits of a Payment Bond to Contractors and Subcontractors
Let’s examine some of the benefits of having this type of surety bond for both contractors and those employed by them.
For General Contractors
As a prime or general contractor, it’s important to keep in mind that your payment bond will also cover your subcontractors’ laborers, suppliers and lower tier subcontractors. That means if one of your subcontractors doesn’t pay their bills, your payment bond could be on the hook. This is one reason you should consider having their subcontractors provide you with payment bonds, because if your sub doesn’t pay their bills their payment bond would be responsible instead of yours.
Too often laborers and subcontractors are left unpaid due to the errors of others. By working with contractors who have payment bonds, you can avoid being left high and dry. If a contractor fails to stand by the payment agreements, you can file a claim against the bond and ensure the financial end of the contract is fulfilled.
Applying for Payment Bonds
Applying for a payment bond is similar to applying for a loan. Surety companies need to determine whether you have the experience and financial capability to complete a project. How the sureties go about this underwriting depends on the size bonds you need.
- For projects less than $750,000, CSBA has programs that are streamlined to limit the paperwork required and are based on your personal credit.
- Projects over $750,000 require financial statements for the company and owner. Payment bonds for projects up to the $2-3 million range can be obtained with high quality internal financials.
- Bonds over the $2-3 million range will generally require financial statements to be prepared by a CPA, but there are exceptions, and we have obtained approvals for bonds in excess of $5 million based on strong internal financials.
When evaluating a contractor’s experience, surety companies are looking to address these questions:
- Do you have the labor and equipment to complete the project you’re being bonded for?
- How many construction jobs have you done that are similar to the current one in size and scope?
- What is your track record of profitable jobs completed?
- Do you have the internal controls to account for and manage the work?
How Commercial Surety Bond Agency Helps CA Contractors Best
The bonding process can be made much more difficult than it has to be without the support of an experienced surety agency like CSBA to help navigate you through it. CSBA is equipped with the knowledge to guide you through the process without endless back and forth, ensuring you get bonded and to work as soon as possible.
One way in which we do that is our internal team of underwriters who know exactly what sureties require and how to best structure your application. We walk you through the payment bonding process every step of the way, getting to know your business and understanding your unique surety needs.
This also better enables us to provide a speedier response to applying for a payment bond. Having a qualified team of underwriters that have extensive experience under their belts means being able to anticipate what a surety company will look for during the process. Having questions answered and the correct paperwork ready to go can allow for a quicker turnaround, getting you to work on a construction bid faster. For example, bonds less than $750,000 can take as little as 24-hours. For bonds over that amount, the application approval can take just a few days.
Without a surety agency behind you that is built of that expertise and experience, the application process can take significantly longer. Holding up your ability to work and build your business. This is why it’s imperative to team with a surety expert to apply for a payment bond rather than a general insurance agent.
CSBA works with 35 surety companies, meaning we can match contractors to the appropriate payment bond for them more easily. Many start-ups or specialty contractors can have a difficult time obtaining a surety bond when first beginning. With the combined experience of our underwriters and the range of surety companies we work with, we’re in a place to better help these kinds of businesses grow.
As you can see, applying for a payment bond is deceptively simple. While the process is fairly straightforward, having a surety agency that knows the potential roadblocks and how to speed the process up is an invaluable asset to growing your contractor business. It’s worth teaming up with the experts so you can focus on what you do best, building California.
We invite you to explore the CSBA Difference and why contractors of varying business sizes have partnered with us for over 35 years. We guide you to growth and provide the literacy necessary to achieve your company’s goals.