Instant Payment Bonds for Contractors

Simpli Surety provides payment bonds instantly with a credit check for projects up to $750,000 and up to $3,000,000 with internal financials. Get your executed bond emailed to you within minutes if you qualify. It’s that simple!

Don't Just Get A Quote...
Get Instant Approval In Minutes

Best Prices

Competitive Rates. Our long lasting carrier relationships ensure we get the best rates, which means best pricing for you.

Instant Approvals

Unlike most bond companies, we offer instant Issuance. We have 1000’s of bonds instantly available to your inbox in minutes.

100% Secure

Safe & Secure. We utilize top level bank encryption to transmit your sensitive information to our A+ rated insurance carriers.

Home > Types of Bonds > Payment Bonds

What Is A Payment Bond?

A payment surety bond is a specific type of contract bond that ensures contractors will pay their subcontractors and suppliers for work performed or materials provided on a construction project..

Also known as “Miller Act Bonds”, “Construction Bonds” and “Labor and Material Bonds”, a payment bond protects the owner of the project, as well as subcontractors and suppliers, from financial loss if the contractor fails to pay for the work or materials. The contractor typically needs to obtain a payment bond from a surety company before beginning work on a project.

Payment Bond Basics

How Do Payment Bonds Work?

Engaging in any form of contractual work exposes certain parties to financial risks. Payment bonds ensure that any subcontractor or supplier gets paid in full and receives full reimbursement according to a contractual agreement.

Due to this, payment bonds are frequently needed for public projects, whether they are state- or federal-funded. On the government’s own property, liens are not permitted. They therefore demand that the general contractor get a payment bond in order to guarantee that everyone working on the project gets paid.

A construction payment bond can be viewed as insurance in the event that the contractor is unable or unwilling to pay the other parties involved in a building project. The bond serves as a “pile of money” against which parties may file claims for payment of money they have earned via the project.

The prime contractor (the party directly contracting with the public entity) is often needed to get a payment bond from an accredited surety business, and the bond itself must be a certain amount on public construction projects (both at the federal and state level).

Depending on the state’s Little Miller Act, each state has a separate bonding requirement that changes depending on a variety of different factors.

Here’s how a payment bond generally works:

The contractor is required to obtain a payment bond before starting work on a construction project.
The surety company issuing the bond evaluates the contractor’s financial strength and creditworthiness to determine if they are able to secure the bond.
If the contractor is approved for the bond, the surety company issues the bond to the contractor, and the contractor is required to pay a premium for the bond.
As work on the project progresses, subcontractors and suppliers invoice the contractor for their work and materials.
If the contractor fails to pay their invoices, the subcontractors and suppliers can make a claim against the payment bond for payment.
The surety company will investigate the claim and, if it is valid, will pay the subcontractors and suppliers the amount they are owed, up to the amount of the bond.
The surety company will then look to the contractor to reimburse the bond for the amount paid.

Are Payment Bonds Different To Performance and Maintenance Bonds?

Yes, payment bonds, performance bonds, and maintenance bonds are all different types of surety bonds serving different purposes in the construction industry.

A payment bond, as mentioned earlier, guarantees that a contractor will pay their subcontractors and suppliers for the work they perform or materials they provide on a construction project.

A performance bond, on the other hand, guarantees a contractor will complete a construction project according to the terms of the contract. If the contractor fails to complete the project to standard, the surety company issuing the bond will either complete the project themselves or hire another contractor to do so, and will then look to the contractor to reimburse the bond for the cost.

Finally, a maintenance bond guarantees that any defects in workmanship or materials will be corrected during a specified period of time after the completion the project project, usually one year. It protects the project owner from poor workmanship or failure to add finishing touches to the final stages of the project.

Three Parties to a Bid Bond

A payment bond involves three parties: the principal (contractor), the project owner (obligee), and the surety company.

1. The Principal

The principal, or the contractor, is the party that is responsible for obtaining the payment bond. They are also the party responsible for paying their subcontractors and suppliers for the work and materials provided on the project.

2. The Obligee

The obligee is the project owner who requires the contractor to obtain the payment bond. The bond protects the owner from financial loss if the contractor fails to pay for the work or materials provided by subcontractors and suppliers on the project.

3. The Surety

The surety company is the party that issues the payment bond. They act as a third-party guarantor, ensuring that the contractor will fulfill their financial obligations to subcontractors and suppliers. If the contractor fails to pay their invoices, the subcontractors and suppliers can make a claim against the payment bond for payment, and the surety company will investigate and pay the claim if it is valid.

Payment Bond Benefits

A payment bond provides several benefits for all parties involved in a construction project:

Protection for the project owner: The bond guarantees that the contractor will pay their subcontractors and suppliers for the work and materials provided on the project, protecting the owner from financial loss if the contractor fails to do so.
Protection for subcontractors and suppliers: The bond guarantees payment for the work and materials provided, protecting subcontractors and suppliers from non-payment and financial loss.
Reduced risk for the contractor: By obtaining a payment bond, the contractor can demonstrate to the project owner that they have the financial strength and creditworthiness to secure the bond, which can help them win more projects and reduce their risk of non-payment.
Peace of mind for all parties: The bond provides all parties with the assurance that financial obligations will be fulfilled, helping to ensure the smooth completion of the project and boost trust in the construction industry.
Encourages competition: It allows small businesses to bid on construction projects that they might not otherwise have been able to afford to bid on
Compliance with laws and regulations: Many states and municipalities require payment bonds for public construction projects, so obtaining a bond can help the contractor comply with these laws and regulations.

It is possible for a Surety Bond Company to “cap” a bid bond. This means they will have a maximum bid amount on the bid bond and therefore a maximum bond penalty.

Cost

Cost of bid bonds depends on the surety bond company and broker. MG Surety Bonds does not charge for bid bonds. We want to build a long-term relationship with our clients and issue bid bonds as part of that service.

How to Get a Bid Bond

In most cases, companies with good credit can get bid bonds up to $500,000 freely with a simple application. Larger bid bonds may require additional information and our staff are happy to help you through the process. You can see the process for obtaining a bid bond in the chart below:

Contractors can also learn more about construction bond underwriting and what it takes to get bid bonds here. As contractors grow, they may need more surety bond capacity to take on additional work and to obtain more bid bonds. You can read more about increasing your surety bond capacity here.

What Happens to the Bond After the Bid?

Should you be the successful bidder, the Obligee will likely require you to enter into a contract. At that point, they may ask you to provide Performance Bonds and Payment Bonds.

Should your bid be unsuccessful, the bid bond will simply expire, and you can shred it and move on to the next job. There is no need to have the bid bond returned.

When Would Someone Make a Claim on a Bid Bond?

Bid bond claims are rare. Normally they occur in one of two circumstances:

• When the Contractor (Principal) decides not to enter into the contract for that price

• When the Bond Company (Surety) decides that they will not support performance and payment bonds for the project.

Both circumstances typically happen when a contractor makes a large mistake. The Obligee could then make a claim on the bid bond. An example is below:

Contractor 1 bids a project with a 5% bid bond. The bid is turned in at $700,000. Contractor 2 is the second lowest bidder at $1,000,000. After reviewing their bid, Contractor 1 realizes they made a mistake and left something out. Contractor 1 tells the Obligee that they will not be entering into the contract. The Obligee can then make a claim on the bid bond for $35,000 ($700,000 x 5%) to compensate them for having to rebid the project or go to the next bidder.

Suppose in the example above that Contractor 1 still wants the project at $700,000 and would like to go ahead. Their surety bond company may decide not to support the project. The Contractor must either find another surety bond company who will support the project or the Obligee can make a bid bond claim. You can read all about bid bond claims here.

Defenses to Bid Bond Claims

A valid defense to a bid bond claim is clerical error or error in transposing the numbers. For example, let’s say a material supplier gave you a bid for $50,000 but in your rush to get your bid together, you wrote it down as $5,000. This could be a valid defense to a bid bond claim.

Best practice is to go the Obligee as soon as you know there is a mistake. Regardless or whether there is a valid bid bond claim or not, most good owners and contractors do not want to start a project with someone who is upside down on the project. They may decided that it is best to move on to the next bidder.

Indemnity

Bid bonds are written on The Principle of Indemnity. That means that if a valid claim does happen, and the surety bond company pay a claim, they will seek reimbursement from the contractor any other indemnitors. The terms are normally spelled out in the General Indemnity Agreement which a contractor will be required to sign with the surety bond company before receiving any bid bonds.

Electronic Bid Bonds

Many Obligees have moved to electronic bidding. This is especially true for Department of Transportation projects. The underwriting for obtaining these electronic bid bonds are still the same. Once the bid bond is approved by the surety bond company, the electronic bond is approved in the bidding system.

What to Look for in a Bid Bond Company

The bid documents will outline the requirements for the surety bond company writing your bid bond. Many will require that your surety bond company be rated “A-“ or better by the rating agency A.M. Best. Contractors should be very suspicious about using a bond with a lesser rating. Most contracts will also require your surety bond company to be listed on the U.S. Department of Treasury’s Circular 570 which you can check here. This is sometimes shorted as a “T-Listing”.

Looking For Something Else?

We have thousands of bonds instantly available.

Payment Bond Claim Scenarios

A payment bond claim can occur in several scenarios:

Non-payment

The most common reason for a payment bond claim is non-payment by the contractor on the construction contract. If the contractor fails to pay their subcontractors and suppliers for the work and materials provided on the project, the subcontractors and suppliers can make a claim against the payment bond for payment.

Bankruptcy or insolvency

In the event of the contractor’s bankruptcy or insolvency, the subcontractors and suppliers can make a claim against the payment bond for payment.

Dispute over payment

If there is a dispute over the amount the contractor owes to the subcontractors and suppliers, the subcontractors and suppliers can claim against the payment bond for payment.

Work done under duress

If the contractor forces the subcontractor to perform work under duress, the subcontractor can make a claim against the bond for non-payment.

Change of scope

If the contractor has a change of scope of work and the subcontractor is not compensated for the extra work, the subcontractor can make a claim against the bond.

It is possible for a Surety Bond Company to “cap” a bid bond. This means they will have a maximum bid amount on the bid bond and therefore a maximum bond penalty.

Cost

How to Get a Bid Bond

What Happens to the Bond After the Bid?

Should you be the successful bidder, the Obligee will likely require you to enter into a contract. At that point, they may ask you to provide Performance Bonds and Payment Bonds.

Should your bid be unsuccessful, the bid bond will simply expire, and you can shred it and move on to the next job. There is no need to have the bid bond returned.

When Would Someone Make a Claim on a Bid Bond?

Bid bond claims are rare. Normally they occur in one of two circumstances:

• When the Contractor (Principal) decides not to enter into the contract for that price

• When the Bond Company (Surety) decides that they will not support performance and payment bonds for the project.

Both circumstances typically happen when a contractor makes a large mistake. The Obligee could then make a claim on the bid bond. An example is below:

Defenses to Bid Bond Claims

Indemnity

Electronic Bid Bonds

What to Look for in a Bid Bond Company

How to Get a Payment Bond

Getting a payment bond traditionally involved numerous steps and took several weeks.

Now, with Simpli Surety’s online application process, it’s a 1-step application that you need to fill out, and then receive your executed bond in your email immediately. Click below to get your instant payment bond.

Get Your Payment Surety Bond Instantly

Simpli Surety combines top surety experts with cutting edge technology to serve you the best bonding experience in the industry online.

Payment Bond FAQs

Why do I need a payment bond?

You need payment bonds because, like performance bonds, they are necessary after winning a bid for a public construction project. Payment bonds are crucial for guaranteeing that suppliers and subcontractors are paid in accordance with the conditions outlined in their contracts. This guarantees that other parties involved in the process won’t lose money even if issues occur.

One of the key advantages of having a payment bond is that it makes working with you much more enticing for suppliers and subcontractors because they know they won’t likely suffer as a result. When these parties deal with unbonded contractors, they significantly increase the possibility that, should issues emerge, they won’t be paid for their contributions and could suffer substantial financial consequences.

What is the price of a payment bond?

Payment bond prices can vary, but they often hover around 3% of the total contract sum if the applicant has strong financial standing. For instance, a 3% premium would result in a $6,000 bond expense if your bond demand is for a $200,000 bond. The price of a construction payment bond will vary depending on a number of variables, including the contractor’s experience, creditworthiness, and financial stability.

Is it possible to only get a payment bond, and not a performance bond?

Typically, this bond cannot be obtained without other supporting bonds. However, in a few uncommon circumstances, you might just need to secure a payment bond for some private construction projects.

However, you will almost probably be asked to secure further contract bonds if you are working on a federal or state project and are obliged to obtain this bond.

How do claims for payment bonds work?

A contractor’s top objective should be to prevent a payment bond claim if possible. You should speak with your surety and cooperate with them to find a quick solution if you are having trouble paying your subcontractors. This actually prevents many, if not most, claims from being made.

Subcontractors, suppliers, and workers must adhere to a number of procedures in order for their claim to be accepted. They must submit a preliminary notice of claim within a certain amount of time following the conclusion of their job before submitting a payment bond claim. The claim might not ultimately be approved if a preliminary notice is not submitted.

The Miller Act prohibits first-tier claimants on federal construction projects from submitting a preliminary notice. Second-tier claimants have 90 days from the completion of the last piece of work to file a notice.

State rules specify the time frame for filing a preliminary notice and any other conditions for payment bond claims on state and public projects.

These specifications are typically included in the contract between the owner and the contractor for private projects, as well as the payment bond. For private developments, state requirements are still in effect.

The surety then intervenes to review the claim and determine if the subcontractors’ responsibilities have matured whether they have completed all necessary and timely steps when submitting their claim. All subcontractors, suppliers, and workers who have suffered losses as a result of the general contractor must get compensation from the surety if it determines that the claim is valid and fair.

The contractor is then required to reimburse the surety for any compensation granted to claimants once the surety has paid them.

In times of crisis, it is crucial to work with the right surety. A strong surety will stand by your side should a claim be made against your payment bond and can assist you in resolving problems before they become claims.