North Carolina Payment and Performance Bonds

What are North Carolina payment and performance bonds?

North Carolina payment and performance bonds are two contract surety bonds that a contractor posts after winning a construction job. The performance bond guarantees the contractor will finish the work according to the plans, specifications and conditions of the contract. The payment bond guarantees the contractor will pay the subcontractors, laborers and material suppliers on the job.

Under North Carolina's Model Payment and Performance Bond law (G.S. 44A-25 to 44A-35), local public owners must require both bonds, each for 100% of the contract amount, from every contractor with a contract over $50,000 when the total construction contracts on a project exceed $300,000. Each bond involves three parties: the contractor (the principal), the surety that issues the bond, and the project owner (the obligee), such as a state agency, the UNC System, a county, city, school board or private owner. The two bonds are usually issued together for a single premium.

Key facts

Who needs North Carolina payment and performance bonds?

Contractors that build public projects in North Carolina need them. Under G.S. 44A-26, when the total construction contracts awarded for any one project exceed $300,000, the contracting body must require both bonds from each contractor or construction manager at risk with a contract over $50,000. For state departments, state agencies and the UNC System and its campuses, the project threshold is $500,000. Below those thresholds, the owner may still require bonds on any construction contract at its discretion, and many do.

Private owners, lenders and general contractors also require these bonds by contract on commercial, multifamily and industrial work, and generals often require them from their larger subcontractors. The two bonds protect different people:

The bid documents control each project. Owners can require bonds on smaller contracts, and private owners set their own amounts and forms. Contractors and agents should read the solicitation before quoting.

What makes North Carolina's bonds different

North Carolina's bond rules differ from most states in a few ways agents and contractors should know before quoting.

• Two thresholds work together. Bonds are triggered by the size of the whole project, not just the contract. Once total construction contracts on a project exceed $300,000, every contractor with a contract over $50,000 must be bonded, so a $60,000 trade contract on a $2 million school project needs bonds.
• The state has a higher threshold. State departments, state agencies and the UNC System require bonds only when total contracts on a project exceed $500,000, a change made in 2010. Local governments stay at $300,000.
• Owners can bond smaller jobs. Below the thresholds, a contracting body may still require 100% performance and payment bonds on any construction contract, so small jobs are often bonded too.
• The law is written into every bond. The bond statute's terms are conclusively presumed written into every bond, and no agreement between the owner, contractor or surety can shorten the notice or suit deadlines.
• Second-tier claimants have extra steps. Subcontractors and suppliers without a direct contract with the prime must give a notice of claim within 120 days of last furnishing. On claims over $20,000, they must also serve a Notice of Public Subcontract, or recovery is limited to work done in the 75 days before notice.
• Contractors must hand out a project statement. On bonded projects, the prime contractor must give each subcontractor a project statement that names the surety and an agent for service, and each subcontractor must pass it down. A subcontract isn't enforceable against the lower-tier party until it gets the statement.
• Retainage is limited, and the surety has a say. No retainage is allowed on public projects under $100,000, and it is capped at 5% on larger ones. Once the project is 50% complete, the owner stops withholding retainage with the surety's written consent if the contractor is performing satisfactorily.
• The surety's liability is capped. No surety is liable on a payment bond for more than the bond's face amount, no matter how many claims are filed.

Bond requirements by project owner

G.S. 44A-26 sets the bond rule for nearly every North Carolina public owner, with a higher project threshold for state agencies and the UNC System. Bid deposits are set by the formal bidding statute.

Construction managers at risk are covered by the same thresholds. A bidder that fails to sign the contract within 10 days after award or fails to provide the bonds forfeits its bid deposit. Check the bid documents for each project.

Circle Surety's contract bond program gives contractors an instant program approval. Bid, performance and payment bonds for individual jobs are then issued under that approval in minutes. Agents can set up contract bond capacity for a client once and bond each new North Carolina job as it comes.

How much do North Carolina payment and performance bonds cost?

North Carolina payment and performance bond premiums are typically calculated on a sliding scale, where the rate usually steps down as the contract amount grows. In the example below, the rate typically starts at 3% on the first $100,000 of the contract price and steps down to 1% on the portion over $2,500,000, though the tiers and rates usually vary by surety. One premium covers both bonds together; the payment bond is usually included at no added cost when it is written with the performance bond. The rates below are a hypothetical example; the actual rate can only be determined after a completed application is received. Premium rates by contract amount:

Estimated one-time premiums for common contract amounts:

Estimates cover the performance and payment bonds together for the life of the contract; minimum premiums vary by surety. Change orders that raise the contract price raise the premium. Contracts over $2,000,000 require additional financial information.

Circle Surety can provide instant quotes for these and many other bonds through our online portal.

How to get North Carolina payment and performance bonds

1. Read the bid documents. Confirm the bond amounts, the owner's bond forms and whether the project's total contracts cross the $300,000 or $500,000 threshold.
2. Line up the bid bond. Formally bid projects of $500,000 and above require a bid bond or deposit of at least 5% of the bid. Get the bid bond before bid day.
3. Apply online. Fill out the short form below, as the contractor or on your client's behalf. A soft credit check is required to determine program approval and the final premium.
4. Gather the contract details. After award, provide the contract price, the owner's name, the project name and number, and the contractor's exact legal name and North Carolina license number as they appear on the contract.
5. Sign and pay. All contract bonds require a general indemnity agreement signed by the company and its owners. Once it is signed and the premium is paid, the bonds are issued with the surety's power of attorney attached, usually in minutes.
6. Deliver the bonds to the owner. Deliver both bonds with the signed contract within 10 days of award, then give each subcontractor the contractor's project statement naming the surety.
7. Report change orders. Notify the surety of change orders that increase the contract price so the bond amounts and premium can be adjusted.

Requirement details

Bond conditions

The performance bond is conditioned on faithful performance of the contract according to its plans, specifications and conditions, and is solely for the protection of the contracting body. The payment bond is conditioned on prompt payment for all labor or materials the contractor or a subcontractor is liable for, and is solely for the protection of the people who furnish them. Both bonds take effect when the construction contract is awarded.

Surety requirements

Both bonds must be executed by one or more surety companies legally authorized to do business in North Carolina. Anyone entitled to sue on a payment bond can require the contracting body to furnish a certified copy of the bond and the construction contract on 10 days' notice.

Contractor project statement

On every bonded public project, the prime contractor must give each subcontractor a project statement that includes the name and address of the surety and of an agent authorized to accept bond notices. Each subcontractor must pass a copy to its own subcontractors, and the contractor must furnish a copy of the payment bond within seven days of a written request.

Construction manager at risk

Construction managers at risk are treated like contractors under the bond law. When the project's total contracts exceed the threshold, a construction manager at risk with a contract over $50,000 must furnish both bonds.

Retainage and prompt payment

No retainage is allowed on public construction contracts where the total project cost is under $100,000. On larger projects, the owner may hold no more than 5% of each payment, and once the project is 50% complete, the owner stops withholding further retainage with the surety's written consent if the contractor is performing satisfactorily. Contractors can withhold retainage from subcontractors only on the same terms the owner uses.

Private projects and mechanics' liens

North Carolina doesn't require bonds on private projects, but owners and lenders often require them by contract. On private jobs, a recorded claim of lien can be discharged by depositing a corporate surety bond equal to 1.25 times the amount of the lien with the clerk of superior court, which moves the claim from the property to the bond.

Claims: what the bonds cover

• Who can claim on the performance bond: the contracting body named as obligee, after declaring the contractor in default
• Who can claim on the payment bond: subcontractors, laborers and material suppliers who furnished labor or materials for the contract and were not paid in full
• Waiting period: a claimant can sue on the payment bond once 90 days have passed since it last furnished labor or materials without being paid
• Second-tier notice: a claimant with no direct contract with the prime contractor must give written notice of claim to the contractor within 120 days of last furnishing
• Notice of Public Subcontract: on claims over $20,000, second-tier claimants must also serve this notice on the prime, or recovery is limited to amounts earned in the 75 days before notice
• Suit deadline: suit must be filed in the county where the work was performed within 1 year of last furnishing or final settlement with the contractor, whichever is later
• Your obligation: a bond isn't insurance for the contractor. If the surety pays a claim, the contractor and its indemnitors must repay it. Agents should make this clear to clients before issuance

Sources

• N.C. Gen. Stat. § 44A-26 — Bonds required
• N.C. Gen. Stat. Chapter 44A, Article 3 — Model Payment and Performance Bond
• N.C. Gen. Stat. § 44A-16 — Discharge of claim of lien
• UNC School of Government — Dollar thresholds in public contracting statutes
• Session Law 2010-148 — State and UNC bond threshold
• Robinson Bradshaw — Changes to public project payment bond laws