Construction projects for the Federal Government, and also generally for State and local governments, provide workers and suppliers a guarantee of payment by the posting of payment and performance bonds. This gives the contractors and material suppliers on a project a mechanism to protect their right to be paid without having to file a mechanic’s lien and foreclose against government property. Payment and performance bonds are generally issued together, but let’s look at each one closely so you understand their purpose.
If you’re a contractor on a Federal project, for example, you may be required to post a payment bond, which serves as a guarantee that the subcontractors and material suppliers underneath you, including second-tier companies, will be paid. This forms, in essence, a contract between the owner of the project, you as the contractor, and the surety company issuing the bond to ensure everyone is paid appropriately for work performed.
A contractor’s payment bond gives subcontractors and suppliers a legal recourse in a situation where payment is not appropriately given. When a subcontractor files a claim, after it is investigated and found to be legitimate, they are paid by the surety company. Of course, this also means that the contractor is then responsible for compensating the surety company. This means you should avoid claims against your payment bonds as much as possible.
To obtain a payment bond, you must be licensed and bonded with a contractor license bond in the state where the project is occurring. You’ll need to follow all state laws and regulations to operate as a licensed contractor.
If you’re working on a Federal project over $100,000, then you’ll be required by the Miller Act to post a payment and performance bond that covers 100% of the value of the contract. While the cost of the bond may vary depending on credit history, project size, and the finances of your business, the estimated premium for the payment and performance bond is generally between 1-4%. For state projects, you will also be required to obtain the appropriate bonds via a state level law similar to the Federal law.
Performance bonds are generally issued alongside payment bonds, and are often issued in conjunction with a bid bond by one surety company. A performance bonds serve as a guarantee to the performance of the job, meaning that the project work will be completed and meet the contract specifications.
In the event you are unable to complete a contract, the surety company will bid the project out to other companies or otherwise ensure completion themselves. If you don’t complete performance and the surety company has to take over, you’ll then be responsible for re-paying the costs. Make sure you pay attention to the details of the bond so you’re familiar with the processes.
Private project contracts can also stipulate the use of payment and performance bonds for contractors and request that you waive your rights to filing a mechanics lien as part of the contract. Occasionally, a company requires only a payment bond, which is generally available at 50% of the premium for both bonds.
If you would like help understanding the terms of your payment and performance bonds, contact the team at National Lien and Bond. With over 30 years of experience in the construction industry, they can help you understand the details of the bond and handle paperwork to prevent claims.