California Payment Bonds
What is a Surety 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, they don’t protect the contractor that purchases them. The bond benefits your subcontractors, laborers, 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 Payment Bonds
Applying for a payment bond 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.
- For larger projects over $2 million, a CPA may be required to prepare company financials.
Does it Matter Where You Get a Bond in California?
Where a contractor obtains their payment bond may not seem like a big decision, but it can mean the difference between getting contracts for new work and growing your company or being stuck, unable to achieve your goals.
There are two primary places a contractor can go for a payment bond:
An Insurance Agent
Insurance agents can potentially help contractors obtain the surety bonds they need, requiring all the documentation listed above. What they cannot help contractors with is a smoother bonding process. Insurance agents don’t handle bonds exclusively and so, they lack the professional experience that can make getting a bond much easier. They also don’t have the professional relationships with a broad base of surety providers. Lacking those industry connections and access to programs, make it difficult and sometimes impossible for them to match you with the right surety company, and other resources such as construction CPA’s and bankers that can give a competitive edge to your business.
A Surety Specialist
A surety specialist handles contractor bonds exclusively, giving them the expertise to guide contractors through the process. Due to that professional exclusivity, they have formed quality relationships with surety companies to better match contractors to the right provider. These relationships also give them access to special programs that others don’t have and can provide assistance in structuring the financial side of your business to help grow bonding capacity and gain larger projects down the road.
What Does a California 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 these bonds are issued by themselves, they typically have a premium rate less than when a performance bond is included.
The premium rates for a payment bond 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 FAQ
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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