Payment bonds are very common in the construction industry. These bonds are usually required by contractors and sub-contractors. The bond ensures that subcontractors and material suppliers working on a project will be paid on time. The payment bond is usually part of most government construction projects. A contractor must submit the bond before the commencement of the project.
To ensure payments to sub-contractors
The main purpose of the payment bond is to ensure the sub-contractors and workers are paid on a construction project.
To ensure smooth continuity of a project
What happens if suppliers and workers are not paid in time? The work will sooner or later discontinue. This can cause huge delays and losses to the obligee. A smooth continuity of a project is in everyone’s interest. The bond ensures that sub-contractors and employees working on the project are paid on time and are motivated to finish on time as payment is usually for completed projects. In this way, the bond ensures timely payments.
To ensure ethical practices
The rationale behind a payment bond goes beyond the narrow scope of a project. A payment bond is devised to ensure that construction projects are conducted in an ethical manner. Through the bond, the project owner — usually the State–clarifies that everyone is treated fairly. Ethical practices in the industry make certain that regular payments occur. This is an important element in establishing ethical business practices.
To ensure only capable firms are employed
Before issuing a bond, a surety undertakes a thorough investigation into the principal. Specifically, a surety investigates each candidate’s financial stability, their ability to complete the project, and any outstanding loans or taxes. The surety ensures that only capable firms are employed in a project.
To reduce State liability
The bond holds the responsibility of payments firmly on the contractor assigned to the project. In the event of fraud, the contractor is liable. The compensation is paid against the bond. Without such stipulation, the State — as the project owner — can be held liable for losses. The bond then protects the State and the taxpayer’s monies.
