Payment Bonds That Protect Everyone on the Job
Payment bonds guarantee that subcontractors, laborers, and suppliers get paid for their work. On public projects where mechanics' liens are not available, the payment bond is the only financial protection for downstream parties. Required by the Miller Act on federal projects and Little Miller Acts in every state.
*90-day notice period applies to federal projects under the Miller Act. State requirements vary.
What Is a Payment Bond?
Payment bonds are the financial safety net for every subcontractor, supplier, and laborer working on a bonded construction project.
Protection for Subcontractors and Suppliers
A payment bond guarantees that the general contractor will pay subcontractors, laborers, and material suppliers for work performed on the project. If the GC fails to pay, the unpaid parties can file a claim against the payment bond and recover directly from the surety. Payment bonds exist because on public projects, subcontractors cannot file mechanics' liens against government property.
The Miller Act and Little Miller Acts
The federal Miller Act (40 USC 3131) requires payment bonds on all federal construction contracts over $150,000. Every state has enacted a Little Miller Act with similar requirements for state and local public projects. These laws replaced the mechanics' lien remedy on public property. Without payment bonds, subcontractors working on government projects would have no security for payment beyond the GC's promise.
100% of Contract Value, Paired with Performance
Payment bonds are almost always issued at 100% of the contract value and paired with a performance bond. The surety underwrites both bonds together because the risks are related. A contractor who cannot pay subcontractors often cannot complete the project either. Premiums for the performance and payment bond package typically run 1% to 3% of the contract amount, depending on the contractor's financial profile.
Who Can File a Payment Bond Claim
First-tier subcontractors (those contracting directly with the GC) have the clearest claim rights. Second-tier subs and material suppliers can also file claims, but requirements vary. On federal projects, claimants must provide written notice to the GC within 90 days of last furnishing labor or materials. State laws have different notice and filing deadlines. Understanding these timelines is critical for both GCs and subcontractors.
Who Does a Payment Bond Protect?
Payment bonds protect the downstream parties who perform the actual construction work. Without a payment bond on public projects, these parties would have no financial recourse if the general contractor fails to pay.
- First-tier subcontractors contracting directly with the general contractor
- Second-tier subcontractors (sub-subcontractors) with proper notice requirements met
- Material suppliers furnishing materials to the project
- Equipment rental companies providing equipment used on the project
- Laborers employed on the project (wage claims)
- Professional service providers such as testing labs and surveyors where permitted by statute
Real-World Payment Bond Claim
County Road Improvement Project
A general contractor was awarded a $6.2M county road improvement project with performance and payment bonds. The GC subcontracted $1.4M in paving work to a specialty asphalt contractor. After completing 90% of the paving scope, the asphalt sub had not been paid for three consecutive monthly applications totaling $680,000.
The asphalt contractor provided written notice to the GC and filed a claim against the payment bond. The surety investigated, confirmed the work was performed and the payment applications were valid, and paid the subcontractor $680,000. The surety then pursued the GC for reimbursement under the indemnity agreement.
Amount Recovered: $680,000
- • Unpaid progress payments (3 months): $680,000
- • Surety investigation and legal costs: $22,000
- • GC indemnity obligation to surety: $702,000
- • Impact: GC's bonding capacity reduced, surety relationship strained
The payment bond ensured the subcontractor was paid in full for completed work, preventing the financial failure of a small business that depended on that receivable.
Payment Bond FAQ
What is a payment bond?
A payment bond is a surety bond that guarantees the general contractor will pay subcontractors, laborers, and material suppliers who work on a construction project. It is required by law on federal projects over $150,000 (Miller Act) and on most state and local public works. The payment bond exists because subcontractors cannot file mechanics' liens against government-owned property. If the GC fails to pay, unpaid parties file a claim against the payment bond and the surety pays the valid claims.
Who is protected by a payment bond?
Payment bonds protect subcontractors, material suppliers, equipment rental companies, and laborers who furnish work or materials on the bonded project. First-tier subcontractors (those contracting directly with the GC) have the strongest claim rights. Second-tier subs and suppliers can also file claims but must meet specific notice requirements. The project owner is the obligee named on the bond, but the intended beneficiaries are the downstream parties who perform the work.
How do I file a claim against a payment bond?
On federal projects, you must provide written notice to the general contractor within 90 days of your last furnishing of labor or materials, then file suit in federal court within one year. State laws have different requirements. Most states require a preliminary notice within 30 to 90 days and a lawsuit within one to two years. The notice must identify the amount owed, the project, and the labor or materials furnished. Working with an attorney experienced in construction surety claims is strongly recommended.
Are payment bonds required on private projects?
Payment bonds are not required by law on most private projects. However, private owners, lenders, and developers sometimes require them, particularly on larger commercial and institutional projects. On private projects, subcontractors typically have mechanics' lien rights as an alternative remedy. Some subcontracts on private projects include bond requirements flowing down from the owner. When a private owner requires a payment bond, it functions the same as on a public project.
What is the difference between a payment bond and a performance bond?
A performance bond protects the project owner by guaranteeing the contractor will complete the work. A payment bond protects subcontractors and suppliers by guaranteeing they will be paid. Both bonds protect different parties against different risks. They are almost always required together on public works and are underwritten and priced as a package. A contractor who defaults on payment to subs often defaults on project completion as well.
How much does a payment bond cost?
Payment bonds are priced together with performance bonds as a package. The combined premium is typically 1% to 3% of the contract value. There is no separate premium for the payment bond alone. On a $2M project, expect a combined performance and payment bond premium of $20,000 to $60,000. The rate depends on your financial strength, credit, experience, and the project type. Contractors with strong financials and established surety relationships pay rates closer to 1%.
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