A labour and material payment bond provides the deep pocket of a surety to ensure that, for example, a general contractor pays its subcontractors. An owner wants to know that subcontractors are being paid because, if they are not, it reflects badly on the owner and, since the subcontractors actually perform the work on the project, it may adversely affect the project. In effect, the owner is buying peace of mind when it mandates that the general post a labour and material payment bond. We say “buying“ because the cost of this bond is invariably added to the contract price.
When a general is incapable of paying its subs and the surety steps in to pay them, the surety will seek to reduce its losses by collecting any funds that would otherwise be available to the general and then collecting any shortfall from the individuals, usually directors and officers, who guaranteed the general’s obligations to the surety.Continue Reading >