Payment Bond
A surety's promise that the people who build the project will be paid.
Quick Answer
A payment bond is a surety bond, furnished by the prime contractor, that guarantees subcontractors, laborers, and suppliers will be paid for work and materials on a project. If the contractor fails to pay, eligible claimants recover from the surety. On public projects, where liens usually cannot attach, payment bonds are typically required by law.
The Full Picture
Payment bonds exist because subcontractors and suppliers on public projects have no lien rights — you cannot foreclose a lien on a federal courthouse or a state highway. Congress addressed that gap with the Miller Act, which requires prime contractors on federal construction contracts above a threshold set in the FAR to furnish both a performance bond and a payment bond. Most states adopted parallel Little Miller Acts for state and local public work.
Mechanically, a payment bond is a three-party instrument. The prime contractor is the principal, the surety guarantees the obligation, and the owner is the obligee, but the beneficiaries are the unpaid subs and suppliers. If a claimant is not paid, it files a claim against the bond; the surety investigates and pays valid claims, then seeks reimbursement from the contractor under its indemnity agreement. A bond is credit backed by the contractor, not insurance for the contractor.
Who can claim, and when, is set by statute. Under the Miller Act, first-tier subcontractors and suppliers can claim directly. Second-tier claimants, who contracted with a sub rather than the prime, must give written notice to the prime within 90 days of last furnishing labor or material, and suit must generally be filed within one year. Suppliers to suppliers are typically too remote to claim. State statutes vary on these tiers and deadlines.
In preconstruction, payment bonds show up as a cost line and a qualification question. Estimators carry the bond premium, typically quoted as a percentage of contract value on a sliding scale, and bonding capacity limits which jobs a contractor can pursue. GCs on private work may also require payment bonds from major subcontractors, or accept subguard insurance as an alternative, as part of subcontractor prequalification.
Real Examples
Common Misconceptions
People assume: A payment bond is insurance that protects the contractor.
Actually: It protects the unpaid subs and suppliers. The surety expects repayment from the contractor under a general indemnity agreement, so a paid bond claim still comes out of the contractor's pocket.
People assume: Anyone who furnished material to the project can claim on the bond.
Actually: Claim rights stop at a statutory tier. Under the Miller Act, suppliers to suppliers generally cannot recover, and second-tier claimants lose their rights if they miss the 90-day notice deadline.
People assume: Payment bonds and performance bonds are interchangeable.
Actually: They cover different obligations. A performance bond protects the owner if the contractor fails to complete the work; a payment bond protects subs and suppliers if the contractor fails to pay them. Public projects usually require both.
Frequently Asked Questions
When is a payment bond required?
On federal construction contracts above the threshold set in the Federal Acquisition Regulation, the Miller Act requires one. State Little Miller Acts impose similar requirements on state and local public work. On private projects, bonds are required only if the owner, lender, or GC demands them by contract.
Who can make a claim on a payment bond?
Subcontractors and suppliers with a direct contract with the prime, and second-tier subcontractors and suppliers who contracted with a first-tier sub. More remote parties, such as a supplier to a supplier, generally cannot claim under the Miller Act. State rules vary.
What are the deadlines for a Miller Act payment bond claim?
Second-tier claimants must give written notice to the prime contractor within 90 days of last furnishing labor or material. Suit on the bond generally must be filed within one year after the last labor or material was furnished.
How much does a payment bond cost?
Premiums are quoted by the surety, usually as a percentage of contract value that decreases as contract size increases, and depend on the contractor's financial strength and track record. Performance and payment bonds are commonly priced together.
What is the difference between a payment bond and a mechanic's lien?
A mechanic's lien is a claim against the property itself and is generally available on private projects. A payment bond is a claim against a surety and substitutes for lien rights on public projects, where liens usually cannot attach to government property.