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Payment Bonds guarantee that sub-contractors and suppliers will be paid by the main contractor, which ensures projects are not derailed by contractor cash flow problems.
Are you worried about your project being completed smoothly and on-time? Do you have concerns about your main contractor not paying their sub-contractors or supplies, causing delays and shoddy work? Requiring a Payment Bond as part of your contract is the perfect solution to this.
At Provide, we offer comprehensive & affordable Payment Bonds. Our quick turnaround times mean that you can have your insurance needs easily settled, allowing you to focus on running your business.
What are Payment Bonds? Why are they useful?
A Payment Bond is an insurance policy that helps to ensure that sub-contractors and suppliers of the main contractor get paid for their work.
Payment Bonds are frequently used in construction-related projects. As part of the contract terms, clients will often require contractors to purchase Payment Bonds. Such a bond ensures that the main contractor’s sub-contractors and suppliers get fully paid, in a timely fashion, for work and materials supplied. This avoids scenarios where the main contractor is unable, or unwilling, to pay their sub-contractors and suppliers, leading to project delays or substandard work.
Requiring main contractors to carry Payment Bonds improvs the odds that the client’s project will be completed properly, and according to schedule. Cash flow issues and insolvencies are common in the construction sector. Payment Bonds help to ease those liquidity concerns by having a reputable insurance company, with a healthy balance sheet, back the payments.
How do Payment Bonds work?
Payment Bonds will pay out their insured amount to sub-contractors and suppliers, if the main contractor does not pay them according to their contract terms.
If the sub-contractors and suppliers face payment issues, they can activate the Payment Bond (also referred to as “calling” the bond). Once the bond is called, the insurance company will compensate the affected sub-contractors/suppliers. The insurer will then reclaim the amount that they paid out from the main contractor.
On-Demand vs Conditional Bonds:
1. On-Demand Bond: The client can call the bond at any time, for any reason. The insurer will then pay out the insured bond amount.
2. Conditional Bond: The client can only call the bond if specific conditions are met. The client will have to prove that the contractor failed to meet specific conditions of their contract. This proof must be provided before the insurer will pay out the insured bond amount. In the event that the contractor becomes insolvent/bankrupt, the bond can be activated to protect the client.
Usually, Payment Bonds are structured as on-demand bonds.
When do you need a Payment Bond?
Payment Bonds are frequently issued together with Performance Bonds. This is especially common when dealing with larger projects of at least several hundred thousand dollars in value. Clients will require bidders who’ve won the contact to have a Payment Bond policy, in order to ensure the project goes ahead smoothly.
Here are some brief examples of projects where Payment Bonds may be gainfully used:
- Construction: Building a house or commercial structure. Delays in housing or commercial buildings can be very costly to the owners, or investors who fund the project. Payment bonds help to mitigate the chances of delays or shoddy work caused by sub-contractors/suppliers going unpaid, or even going bankrupt due to severely delayed payments.
- Maintenance/Servicing: Maintenance contracts for equipment & machinery, especially when large amounts of complex machinery need to be tended to. Any delays in fixing the machinery may cause significant costs to the client. As such, clients can consider requiring the main contractor to carry a Payment Bond, to ensure that all sub-contractors are paid in a timely manner, so that the maintenance contract proceeds without a hitch.
How much coverage do I need?
Payment Bonds should cover the amount that the main contractor estimates they will need to pay all their sub-contractors, and suppliers.
Payment Bond vs Performance Bond
Payment Bonds are sometimes confused with Performance Bonds. They are two different types of insurance bonds, with very different purposes. In construction-related work, Performance Bonds are usually issued together with Payment Bonds to protect the client’s project.
Ensure sub-contractors and suppliers to the main-contractor get paid
Ensure that the contractor performs satisfactory work and upholds their contractual responsibilities
Main beneficiary of the bond
Sub-contractors and suppliers, and the project owner/client
How much do Payment Bonds cost in Singapore?
The premiums for Payment Bonds can range between 1-3% of the insured amount. Such premiums are highly affordable, especially considering the costs that project owners have to bear if there are work delays due to non-payment of sub-contractors or suppliers.
With Provide, you save up to 25% on your premiums. Our digital operating model creates lower overheads, and we pass every dollar saved back to our clients.