What Are Payment Bonds? – An In-Depth Exploration
Over the years, Canada has exploded in terms of construction. There are innumerable contractors in the industry and many of these entities have been able to gain immense wealth. Of course, these companies need to proceed through a few steps, before they’ll be able to operate legally within Canada. Among the initial steps, the contractor will need to make sure that they obtain the appropriate bonds. Although the bid bond will generally come first, the payment bond is even more vital. Below, you will learn all about this bond, its purpose and how you can obtain your own.
What Is It?
First, you should learn about the basics. The Payment Bond is a type of surety bond, which is commonly utilized within the construction industry. The bond is assigned to contractors and generally helps to protect everyone that they work with, including subcontractors, laborers and material suppliers. When obtaining the payment bond, the contractor is confirming that they’ll follow through with their duties and pay these entities, within a reasonable period of time.
Who And When To Obtain The Payment Bond
Now, you should figure out precisely who is responsible for obtaining the bond and when it should be obtained. Generally, the contractor is responsible for obtaining the bond, but in some cases, the subcontractor may also do so. Typically, the bond is obtained, after the project owner has accepted the contractor’s bid. The bonds should be obtained, before anyone begins working on the project. With this in mind, there are three parties involved in the arrangement. Below, you will learn about the three involved parties.
- Obligee –This is the entity, which is requesting the bond. It could be the laborer or a subcontractor.
- Surety Bond Company –This entity is responsible for assigning the bond.
- Principal –The principal is the individual, company or entity, which is responsible for obtaining the bond. In the construction industry, this would be the contractor.
Who Is Protected?
The Payment Bond is truly essential for the construction project. Although the contractor generally obtains the bond, it only protects the companies that the contractor needs to pay in the future. For instance, it will protect subcontractors, laborers and suppliers. If these entities are not paid, within a reasonable amount of time, the bond will provide them with a way to take action against the contractor. When the contractor fails to make a payment, the subcontractor can file a claim, speak with the surety and potentially receive money from the surety. Of course, this will only occur, if the surety sides with the subcontractor.
When it comes down to it, the payment bond requirements vary to some degree from province to province. However, the majority of construction projects will require you to obtain some type of payment bond. In some cases, the contractor will need to obtain a payment and performance bond. For the majority of private and federal projects, the bond will be required. Also, the contractor will generally need to acquire a contractor
license bond, before they’ll be eligible to acquire the payment bond.
Similarities And Differences Between Performance And Payment Bonds
The majority of contractors will agree that performance and payment bonds work hand in hand. They’re very similar and are obtained at the same time and usually from the same surety company. After the bid has been won, you will need to obtain the payment and performance bond, before the work can begin. Generally, it is impossible to obtain the payment bond, without also acquiring the performance bond, so they do work in conjunction with one another.
Of course, there are some differences. The payment bond ensures subcontractors, laborers and suppliers that they’ll be paid by the contractor. The performance bond actually protects the project owner. It guarantees that the project will be carried out and completed in a satisfactory manner and within a reasonable period of time.
When attempting to acquire a payment bond, you will find that the price can differ slightly and will usually be determined by a handful of factors. For starters, the cost will always depend on the amount of contractor. You’ll always be required to pay a specific percentage of the contract amount and this will be referred to as the premium. In order to
determine the rate, you will be judged based on a handful of different factors, including your business’s financial stability, reputation and your current credit record.
If the contract is under a specific threshold, the surety company will focus more intently on your credit score. Those that are lucky enough to have a good credit score will be able to obtain a low rate, which could range from 1 to 4%. However, if the contract amount has met or exceeded the threshold, the surety company will pay more attention to your business and its financial records. For payment bonds, the application process can be lengthier, since the surety company will need to analyze so much information.
How Payment Bond Claims Play Out
In the event that the contractor fails to submit a payment in a timely manner, the subcontractor may decide to file a claim with the surety company. Once the claim has been filed, the surety company will begin carrying out an investigation and trying to determine which party is in the wrong. If the surety sides with the subcontractor or laborer, they can pay out these companies and compensate them for their work. After this has concluded, they’ll generally go after the contractor and attempt to regain their losses.
As a contractor, you should do your best to prevent problems from escalating this far. As soon as a claim is filed, you should reach out to the subcontractor, supplier or laborer and attempt to workout the problem. The majority of claims can actually be settled ahead of time with a little bit of communication and negotiation.
Get Covered with ConstructionBond Now
If you wish to work as a contractor, you will need to familiarize yourself with payment bonds. Remember that these bonds are almost always required, so learning how to obtain them now is pertinent. Also, be sure to work diligently to pay your laborers and subcontractors as quickly as possible, so you can avoid claims and future headaches.