A construction project is a complex job which involves massive investment. Also, there are several third parties involved in a typical project. These include people such as sub-contractors, material suppliers, and laborers. Since the stakes are high, contractors need to secure the projects with some kind of surety. Performance bonds and payment bonds are two main kinds of surety bonds used in the construction industry. Performance bond is a bond whereby a surety (insurance company) guarantees the completion of the project by the principal (contractor) to the obligee (project owner).
All About Payment Bond
The other kind of bond is the payment bond. This is surety bond which ensures that subcontractors, material suppliers, and laborers are paid according to contract. It is a contract between the principal (contractor) and the surety (insurance company). The third party providers are the beneficiaries who can claim compensation on the event of non-fulfillment. It is mostly used for public sector construction projects, where mechanic’s liens (security interests) do not apply. Payment bonds typically accompany performance bonds. In fact, they are even found on the same bonds form. Both of them are meant to protect the interests of the obligees (project owner or third parties as the case may be).
The purpose of the payment bond is to reassure the third parties working on the contract about the timely payment for them. Normally payment and performance bonds work together, in the event of non-completion of the contractor. In case the contract is not fulfilled according to the specifications mentioned therein, the surety has to pay damages to all the demanding parties. When the contractor fails to pay the subcontractors, suppliers and laborers, they can claim their dues directly from the surety.
Cost of Payment Bond
As said before, payment bonds are usually bundled up with performance bonds, though they may be taken individually too. Like the performance bond, the contractor need not purchase it in the course of bidding process. He has to submit it only when he wins the bid and gets the project. The bond specifies the amounts to be paid to the subcontractors, suppliers and laborers and also mentions the timelines. The premium ranges between 1% and 2% when the two bonds are issued in conjugation. However, the cost may vary on the basis of the credit history and market standing of the contractor.
Claims Against Payment Bond
There are a number of formalities that the obligees have to complete before filing a claim against a payment bond. They need to file a preliminary notice within a specified timeframe after completion of their work on the project. The specified timeframe depends on the regulations laid down by the state where the contract is carried out. The claimants have to be very particular about this otherwise the claim may be rejected. Once a legitimate claim is made, the surety has to compensate the claimants. The surety is entitled to receive this amount back from the contractor.
Getting the right surety provider enables the contractors to fulfill their bond requirements effectively. Professional providers can simplify the task and make it hassle-free. To know more, visit https://swiftbonds.com/performance-bond/