Glossary of Business Credit Terms

# A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

Payment Bond

What Is Payment Bond? 

The payment bond protects the suppliers, subcontractors, and laborers in case the contractor doesn't pay them what is owed under the contract. If they aren't paid, the surety company will step in and make sure they get paid what is owed.

How does payment bond work?

Usually, contractors or subcontractors are expected to acquire payment bond before they start working on a construction project. Their aim is to give assurance that labor and materials given by suppliers and subcontractors will be paid in a timely fashion and in compliance with the agreement.

Payment bonds also assure that payments for materials and work force adhere to the state and federal laws and regulations. These bonds basically serve as protective shield for subcontractors, and grant them legal remedy against those contractors who fails to live up to their obligations. Simply, payment bond is an agreement between three parties where obligee (the subcontractor, supplier or laborer) ask for the bond, the principal (the contractor) who acquires the bond, and lastly surety Bond Company who underwrites the bond.

If a contractor defaults on obligations and has failed to pay subcontractors, then suppliers and laborers can initiate a claim process within a particular period of time and get reimbursement by surety. Here, the role of surety is to assess and investigate the entire situation. They decide whether a claim is legitimate or not. If a claim appears to be valid, obligees should be compensated for their losses up to full amount. As with every agreement, principal (contractors) must repay surety for its backing. Also, contractors should make sure to avoid claims, not to default on their responsibilities, and seek solutions before they make things worse.

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