Published Nov 23, 2020
How devastating would it be to find out that after months of hard work, you weren’t going to receive payment for your services? Luckily, laborers and suppliers shouldn’t worry if the contractor on the job posted labor and material bonds. But just what is this bond, and how does it protect subcontractors? We’re here to talk about that.
What are labor and material bonds?
The more common term for labor and material bonds is a payment bond. This payment bond is a binding three-way contract between the contractor (principal), property owner, and the surety that all laborers, suppliers, and subcontractors working on the project will be fairly compensated. Sureties are companies licensed by the Insurance Department and other regulatory agencies to write bonds in a state where the work is to be executed.
Payment bonds essentially provide protection for the different stakeholders on a construction project. In this bond, the general contractor, or the principal, promises to pay the stakeholders who contribute to the project. If he fails to fulfill this promise, the surety will pay damages to these stakeholders in their place.
It’s not uncommon for these payment bonds to go hand in hand with performance bonds, guaranteeing that a contractor will fulfill all their contractual obligations in the specified time frame. In public construction projects, payment bonds take the place of mechanic’s liens claims, as mechanic’s liens cannot be filed against public properties.
Labor and material bonds vs. Mechanic’s liens
The primary difference between labor and material bonds vs. mechanic’s liens is that mechanic’s lien claims cannot be filed against public properties, which is where payment bonds come into play. A mechanic’s lien is a claim for unpaid construction work and materials. It works by clouding a property’s title, making it difficult for property owners to sell it until the lien claims are paid.
What labor and materials can be reimbursed?
A supplier or subcontractor may recover the value of the labor and materials they provided to a project of different natures. This includes construction, alteration, and repair of any public work or building of the United States. Labor may include simple supervisory work done by project managers on-site.
The general rule of thumb is that if materials have been consumed or will be consumed within the project’s scope, then suppliers may be reimbursed for them.
What should subcontractors do with this labor and material bond?
Subcontractors and suppliers are considered the claimants in a labor and material bond. They are not typically provided with the bond, but they are actually entitled to see it under the Miller Act, which specifically provides the right to information, where the right to see this bond falls under.
Knowing the terms and conditions is imperative for making a claim under this bond. They define the time limitation, necessary documents, and the parties that need to be notified to make a claim. It is a good practice for all subcontractors and suppliers to ask for the labor and material bond upon receiving their contract.
How much do labor and material bonds cost?
Payment bonds largely vary depending on the state. The terms of the bond, including what labor and material the bond will cover, its amount, time limitations, and what contracts are included, may be completely different from one state to the next. The bond premium will also be a product of the contractor’s credit history, past jobs done, and outstanding credit aside from these technicalities. We recommend referring to this comprehensive guide for each state’s laws regarding payment bonds.
Interested In Cutting Technologies?
For nearly 40 years Cutting Technologies (CTI) has been the go-to demolition contractor for technically demanding, one-off jobs. Our wealth of experience enables CTI to bring “outside-of-the-block” approaches to achieve the impossible. Contractors trust CTI to get the job done right. Take a look at our demolition services on our website.
About The Author
Terrence Tan Ting is an industrial engineer by profession but a full time writer by passion. He loves to write about a wide range of topics from many different industries thanks to his undying curiosity.