Payment bond

A payment bond protects the people who work on or supply a construction project that they will be paid. On public projects, mechanics' liens usually cannot attach to government property, so the bond takes the lien's place. The Miller Act requires a payment bond, along with a performance bond, on federal construction contracts above a statutory threshold, and most states have "Little Miller Acts" with their own thresholds for state and local work. Private owners and lenders may require one too.

Three parties are involved: the principal (the contractor), the obligee (the project owner) and the surety. If the contractor fails to pay a subcontractor or supplier, that unpaid party can claim against the bond, provided it meets the notice and filing deadlines. The surety investigates, pays valid claims up to the bond's penal sum, then seeks repayment from the contractor under the general indemnity agreement. Unlike insurance, a bond is a form of credit; the contractor, and often its owners personally, remain liable.

Deadlines are the common pitfall. Sub-tier claimants must usually give written notice within a short window and sue within a set period, and the windows differ between the Miller Act and state laws, so get a copy of the bond on day one. The penal sum caps total recovery, and it is typically set at the contract price. The guide on bid, performance and payment bonds: how contract surety works explains how the three bonds fit together, and the surety bond cost calculator estimates pricing. See performance bond for the companion guarantee.