A payment bond is an instrument that guarantees the owner of a contract that the material suppliers and the employees will be paid. A payment bond is usually part of a construction performance bond. The performance bond and payment bond are two different instruments. The payment bond is part of the performance bond and there is normally no additional charge for the payment bond when they write the Construction Performance Bond.
A payment bond is just what it says; it pays for all the material and all of the suppliers if the contractor does not complete the job. The company will step in, take all the bills and make sure that they have been paid before any draws of profits are given to the contractor.
Payments bonds are a very important part of the bonding concept because a lot of times the labor costs run higher than estimated and the contractor runs short of funds to pay all the employees.
Contractors usually have a line of credit with their suppliers. The terms of 30 days net, 10% is usual with most contractors. That means that providing the contractor pays within 30 days he will receive a 10% discount on his bill. This is one thing that the company will check on. They will verify that the contractor does have terms and conditions in place with his suppliers. If they do that is telling the comany that the contractor pays his bills on time.
Payment bonds work with invoices only. If the contractor wants to pay a bill then he must furnish an invoice to the owner or project manager. Both will agree that the bills can be approved and then funds will be advanced to the contractor.
Payment bonds can be handled in various ways. The money or draw can be given directly to the contractor and he pays the bills. This is the most common way that contractor performance bonds are done. Only the standard bonding markets allow the contractor to do this. The reason for this is that they have done business with this particular contractor for a number of years and feel comfortable with them.
Another way that performance bonds are handled is that the owner of the contract would pay all the bills . This is usually not done because the contractor and the owner of the contract cannot always agree on what is to be paid and what is not. In most cases this may cause undue stress between the contractor and the owner which is unnecessary.
The most effective way to handle all bonding projects is with a funds management controller. He works for both the owner and the contractor. When he receives an order or an invoice then he can get if approved by the owner. He verifies that the work has been completed and then disperses the funds directly to the suppliers. The funds never go to the contractor. This is a protection that is there for the owner of the project.
If you need help in find a bonding compamy please call Ric Cline at 1-800-772-9904 or direct at 719-588-3601 and he will walk you through the process.