What Is a Payment Bond in Construction?

January 24, 2024

When people work on a construction project, they want to know that their efforts will be appreciated and that they will receive the payment they deserve. It’s rare that you will find an employer who doesn’t require that their employees or subcontractors take out a specific type of bond to guarantee this. This is however the case for contractors working on federal and state projects, as it is a requirement that they obtain a payment bond in order to bid on any job opportunities.

A payment bond guarantees that the contractor’s subcontractors, material suppliers, and laborers will be paid for their services on a given project. This is an important safeguard for those involved in the construction process as it prevents them from having to file a mechanic’s lien on the property itself, which could cause a significant financial loss if they aren’t paid.

Like other types of surety bonds, the cost of a payment bond is determined by the amount of the bond that is required and the premium rate (the percentage that you pay to get the bond). As with any application for a surety bond, the underwriter will review your credit, financials, and experience before granting your request.

In the event that a claim needs to be filed against a payment bond, a notice of intent should be sent. The specific procedures for doing this will vary by state but will usually involve a letter informing the obligee of the claimant’s intention to take further action in the event that their claim is not paid within the specified time period.

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