payment bonds

Payment Bonds and How They Help the Contractors and Their Suppliers

Construction industry is a very fragile domain where one can never be assured of security on his investment until a project is actually completed. The two primary entities concerned here are the project manager and the contractor. The security concern can be two-way here; i.e. the contractor may have no assurance for receiving payment for the project, while the project owner may feel that the contractor would charge more for the project, and may not complete it even after that. A surety bond ensures that both parties have a security mechanism in place to cover their concerns financially.

While the bond that is signed between a contractor and a project owner is specifically known as performance bond, there are payment bonds that are signed between contractors and their sub-contractors and suppliers. It is these parties that do the majority of the work. These are the groups that mostly provide the manpower and the raw materials for the construction work. The contractor is responsible to manage them effectively. The payment bonds ensure that there is complete transparency between all, so that everyone is secured financially and can focus on their work with complete dedication.

How Payment Bonds Benefit the Concerned Groups

Payment bonds provide the contractor and also the suppliers and subcontractors working with him financial security before investing their resources and manpower in a project. Just like the performance bonds, a surety company works as an intermediary between the two groups, giving either party assurance of financial security through a surety bond.It also does its own survey and assessment to validate the claims of either parties before providing them its backing. By entering into this agreement:

  • Contractors are assured of getting all the manpower and materials as required, on time and just as promised
  • Contractors can then go on to assure the project owners that they have all that is needed to complete the project as per the contract
  • The suppliers are assured that their supplies will be appropriately paid for, and they won’t be oversupplying or giving away their supplies for nothing
  • The sub-contractors will have an assurance for their workforce that their payments will be received in time, as long as they provide appropriate manpower and work on the project assigned by contractors as undertaken
  • The surety company is able to get all on the same page, and has assurance from either party that they will not break the pact, which could otherwise affect the defaulting party in its future projects.

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