California Payment Bonds
What is a Payment Bond?
A payment bond is a specific kind of surety bond that guarantees subcontractors, laborers, and material suppliers are paid according to the terms of a contract. You’ll often see payment bonds required for a contractor bidding on public projects or a general contractor requiring them from their subcontractors.
Payment bonds are sometimes thought of as being like insurance, but there are key differences. For example, payment bonds don’t protect the contractor that purchases them. The bond benefits your subcontractor, labor, and suppliers in case they aren’t paid. When and if that occurs, they can make a claim on the bond. If the bond company is required to pay a claim, they would then look to their contractor (called the principal) to reimburse them.
How to Apply for a Payment Bond
Applying for payment bonds involves surety companies determining whether you have the experience and financial capability to complete a construction project. The specifics aspects of the process depend on the size of the bonds you need, but always involve two primary areas of investigation:
The Contractor’s Experience
- Do you have the labor and equipment to complete the project you’re being bonded for?
- What is your track record of profitable jobs completed?
- Do you have the internal controls to account for and manage the work?
- Depending on the project amount, the surety company may require financial statements from the company and owner.
- Your personal credit
- A CPA involved in preparing financials
What Does a Payment Bond Cost?
When issued with a performance bond, one premium is charged for both the payment and performance bond based on the contract amount. In other words, there isn’t a separate premium for each bond.
When payment bonds are issued by themselves, they typically have a premium rate less than when a performance bond is included.
The premium rates for payment bonds vary depending on the following:
- Size of the bond
- Whether the bond is based solely on personal credit or financial statements are provided
- If financial statements are provided, whether they are internally prepared or done by an outside CPA
- The overall financial strength of the contractor and owners
Payment bonds expire after the project is completed and statutory timeframe have lapsed.
A payment bond is a type of surety bond. The only real difference is the qualifying term, in this case, it’s “payment” and only notes what sort of surety bond it is.
The contractor, or principal, purchases the bond and pays for it.
A payment bond ensures that all of a contractor’s laborers, subcontractors, and suppliers are paid on a particular project.
Payment bonds are required on almost all public projects. General contractors sometimes require them of their subcontractors, and occasionally private owners will require them.
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