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Payment Bond Basics

Payment Bond: A Required Construction Insurance


Payment Bond

A payment bond is required on many construction projects. In the construction industry, the payment bond is usually joined to the performance bond. The payment bond forms a three-way contract between the Owner, the contractor and the surety. The Payment Bond guarantees that all sub-contractors, laborers, and material suppliers will be paid leaving the project lien free. A Payment Only Bond is rarely requested and is billed usually at about 50% of the regular premium.

Payment Bond Terms

The Surety is the company licensed by the Insurance Department and the regulatory agencies to write bonds. The Contractor also called the principal, promise in the payment bond that the contract will be executed according to specified terms, while the Surety promises that if the contractor fails on his payments, it will pay damages to all demanding parties.

On private project the payment bond might become a substitute of a mechanics’ lien. When the principal or contractor fails to pay the suppliers and the subcontractors, they might collect from the surety under the payment bond. Payments under the bond will deplete the penal sum, an amount less than the total prime contract, intended to cover supplier and subcontractor costs.

Payment Bond Form

The most used Payment Bond form is the AIA A312-2010 Performance and Payment Bond Form. This recent payment bond form specifies some important changes when compare to the previous 1984 AIA 312:

The A312–2010 Performance Bond adds language clarifying that the owner’s failure to comply with the notice requirements of Section 3.1 does not release the surety from its obligations under the bond except to the extent the surety demonstrates actual prejudice. Additionally, A312–2010 shortens the notice period for surety default under the bond from 15 days to seven days. Further, the limit of the surety’s obligation to the amount of the bond does not apply if the surety elects to undertake and complete the contract itself. The A312–2010 Payment Bond also has generally updated language. In addition to other changes, the period of time in which the surety must answer a Claimant’s Claim has been increased from 45 days to 60 days, and language has been added stating that a failure of the surety to answer or make payment in the time specified is not a waiver of the surety’s and contractor’s defenses to the Claim, but may entitle the Claimant to attorneys’ fees.’ as stated on AIA website.

Many companies are still using the 1984 version of the AIA 312 Payment and Performance Bond. The bonding companies’, including sureties, obliges, and principals can amend the bond language to specific circumstances of their construction project.
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