Construction Payment Bonds: Complete Contractor Guide 2025

Payment bonds serve as a financial safety net for subcontractors, suppliers, and laborers working on construction projects. When a general contractor fails to pay, the payment bond ensures those who provided work and materials can recover what they're owed.

Quick Definition

A payment bond is a surety bond guaranteeing that the contractor will pay all subcontractors, laborers, and material suppliers. On public projects, this replaces the mechanic's lien rights that would exist on private work.

What Is a Payment Bond?

A payment bond is a three-party agreement between the project owner (obligee), the contractor (principal), and a surety company. If the contractor fails to pay legitimate claims, the surety steps in to pay and then seeks recovery from the contractor.

Obligee

The project owner who requires the bond. They benefit indirectly by having a completed project free of payment disputes.

Principal

The contractor who purchases the bond. They're ultimately responsible for all payment obligations and any claims paid by the surety.

Surety

The insurance/bonding company that guarantees the contractor's payment obligations up to the bond amount.

Payment vs. Performance Bonds

Payment bonds protect subcontractors and suppliers (ensuring they get paid). Performance bonds protect the owner (ensuring the project gets completed). Both are typically required on public works and often issued together.

When Payment Bonds Are Required

Project Type	Requirement	Bond Amount
Federal (Miller Act)	Required for contracts over $150,000	100% of contract value
California Public Works	Required for contracts over $25,000	100% of contract value
Other States	Varies by state (Little Miller Acts)	Typically 100%
Private Projects	Owner's discretion	Varies

How Payment Bonds Work

Contractor Obtains Bond

Before contract award, the GC secures a payment bond from a surety company (typically 1-3% premium).

Work Proceeds

Subcontractors and suppliers perform work and deliver materials, submitting invoices for payment.

Payment Default Occurs

If the GC fails to pay a legitimate claim, the unpaid party can make a claim against the bond.

Surety Investigates

The surety reviews the claim, verifies work was performed, and determines validity.

Claim Resolution

Valid claims are paid by the surety, who then seeks recovery from the contractor.

Filing a Payment Bond Claim

Deadlines (Federal Miller Act)

First-tier subs: No preliminary notice required
Second-tier subs: 90 days from last work to send notice
Lawsuit deadline: 1 year from final work performed

Required Documentation

• Signed contract or purchase order
• Invoices and payment records
• Proof of work performed (photos, logs)
• Correspondence regarding non-payment

Critical Warning

Missing deadlines can completely bar your claim. State "Little Miller Acts" have varying notice and filing requirements. Consult a construction attorney for state-specific deadlines.

GC Responsibilities

Managing Payment Bond Obligations

Maintain payment records – Document all payments to subs and suppliers
Collect lien waivers – Obtain conditional/unconditional waivers with each payment
Pay promptly – Avoid disputes that lead to bond claims
Maintain surety relationship – Bond claims affect future bonding capacity

Protecting Your Payment Rights

Best Practices for Subcontractors

Request bond copy before starting work – Know the surety and bond amount
Send preliminary notices – Even if not strictly required, they create leverage
Document everything – Keep daily logs, photos, and correspondence
Know your deadlines – Calendar all notice and filing dates

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FAQ

What is the difference between a payment bond and lien rights?

On private projects, subcontractors can file mechanic's liens against the property. On public projects, lien rights don't exist (can't lien government property), so payment bonds provide equivalent protection.

How much does a payment bond cost?

Payment bonds typically cost 1-3% of the contract value, depending on the contractor's financial strength, experience, and the project size. Payment and performance bonds are usually purchased together.

Can a second-tier subcontractor make a bond claim?

Yes, but with additional requirements. Under the Miller Act, second-tier subs must send written notice to the GC within 90 days of final work. State requirements vary—some extend coverage further, others limit it.

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