Understanding Labour & Material Payment Bonds
What are the benefits of a labour & material payment bond?
Making a claim under a labour & material payment bond.
Understanding standard bond forms.
Why should you use standard bond forms?
Standard bond forms and templates.
What are the benefits of a labour & material payment bond?
Duty/Obligation
While the owner is not a claimant under the bond and therefore does not derive any financial benefit, the owner does have a moral, legal and often political obligation (in the case of a public sector owner) to make sure all trades on their projects are paid in full.
Eases Administrative Burden
Should a default occur on a major construction project without a payment bond in place, owners may find themselves inundated with phone calls from unpaid subtrades and suppliers demanding payment for work done or materials provided. With a bond in place, the surety takes over thus greatly reducing the administrative burden for the owner.
Reduces Owner’s Legal Exposure
In most jurisdictions in Canada, owners are required by law to hold back 10% from each draw as a reserve against liens posted by trades and suppliers. If a general contractor defaults leaving a trail of liens and unpaid bills, the owner is responsible for distributing these holdback monies among valid lien claimants. By paying outstanding bills to direct trades, a payment bond will largely alleviate lien problems and allow money to flow in a normal manner.
More Competitive Prices
Sophisticated trades and suppliers know which owners call for payment bonds which translates into more competitive prices for the owners. Trades and suppliers know their credit risk is secured by a payment bond which typically translates into a “discount” which is passed along to the owner.
Continuity of Project Team
If a general contractor defaults and no payment bond is in place, unpaid trades and suppliers have little incentive to work with the surety and completing contractor. With a bond in place, there is incentive for the existing team to keep working which allows for a faster and smoother resolution.