A payment bond is a surety-backed guarantee that a general contractor will pay its subcontractors, material suppliers, and laborers on a construction project. If the contractor doesn’t pay, the unpaid parties can file a claim against the bond and collect from the surety instead. Federal law requires one on every government construction contract over $100,000, and most states impose similar requirements on their own public works.
How a Payment Bond Works
Three parties sit on a payment bond. The principal is the general contractor who buys the bond. The obligee is the project owner who requires it. The surety, usually an insurance carrier or bonding company, issues the bond and stands behind the principal’s payment obligations. If subcontractors, suppliers, or laborers go unpaid, they file directly against the bond.
Each bond carries a penal sum, which is the ceiling on what the surety can be required to pay. On federal projects, the Miller Act sets the payment bond at the total contract price unless the contracting officer makes a written finding that a lower amount is justified, and even then it cannot fall below the performance bond amount.1Office of the Law Revision Counsel. 40 USC 3131 – Bonds of Contractors of Public Buildings or Works On state and private projects, 100% of the contract value is the standard, though the exact terms depend on the contract or applicable statute.
Why Payment Bonds Exist
On private construction, an unpaid subcontractor or supplier has a strong fallback: a mechanic’s lien. That claim attaches to the property itself and effectively blocks the owner from selling or refinancing until the debt clears. It gives lower-tier parties real leverage.
That remedy disappears on public work. Government-owned property is generally immune from mechanic’s liens under sovereign immunity. Nobody puts a lien on a courthouse or a highway interchange. The payment bond fills the gap, creating a private fund unpaid parties can tap without encumbering public property. Without it, subcontractors and suppliers would carry all the non-payment risk on government projects, and many would refuse to bid.
When a Payment Bond Is Required
Federal Projects
The Miller Act requires both a performance bond and a payment bond before any federal construction contract over $100,000 can be awarded. The bonds must be in place before the contract takes effect, and the payment bond protects everyone furnishing labor and materials for the project.1Office of the Law Revision Counsel. 40 USC 3131 – Bonds of Contractors of Public Buildings or Works
For federal contracts between $25,000 and $100,000, the Federal Acquisition Regulation lets the contracting officer choose alternative payment protections in place of a full payment bond, such as a bank payment guarantee or an irrevocable letter of credit. The chosen protection is specified in the solicitation.2Office of the Law Revision Counsel. 40 USC 3132 – Alternatives to Payment Bonds Provided by Federal Acquisition Regulation Below $25,000, no bond or alternative is required.
State and Local Projects
Nearly every state has its own version of the Miller Act, usually called a Little Miller Act. These statutes require payment bonds on state and local public construction, but the dollar thresholds vary widely. Some states trigger the bond requirement on contracts as low as $25,000; others set the bar considerably higher. The specific threshold, bond amount, and claims process depend on jurisdiction, so anyone working on state or local work should check the applicable statute rather than assume the federal rules apply.
Private Projects
Private owners are generally not required by statute to demand payment bonds, but many do anyway on large commercial jobs. The reason is practical. On a private project, an unpaid subcontractor can lien the owner’s property. Requiring a payment bond redirects those disputes to the surety and keeps the property clear. When a private job has a valid bond, the unpaid party’s remedy shifts from a lien claim to a bond claim, and the specific terms of the bond document control the process.
What a Payment Bond Costs
The premium is a percentage of the total contract value, not the face amount of the bond, and performance and payment bonds are almost always priced together as a single combined premium. For established contractors with strong financials, the combined premium usually runs between 0.5% and 3% of the contract price. Contractors with thinner financials or less experience pay at the higher end or above. On a $2 million contract, a 2% combined premium works out to $40,000 for both bonds together.
The contractor pays the premium, but the cost is built into the bid, so project owners bear it indirectly. That’s part of why some private owners skip the requirement on smaller jobs where the protection doesn’t justify the expense.
Filing a Claim When You Aren’t Paid
The Miller Act sets out a specific process for recovering money on a federal payment bond, and the rules depend on your position in the chain.
If you contracted directly with the general contractor, you’re a first-tier claimant. You don’t have to send preliminary written notice, but you can’t file suit until 90 days after the last day you provided labor or materials.3Office of the Law Revision Counsel. 40 USC 3133 – Rights of Persons Furnishing Labor or Material That waiting period gives the contractor one last chance to pay.
If you supplied labor or materials to a subcontractor rather than to the general contractor directly, the rules tighten. You must send written notice to the general contractor within 90 days of the last date you worked or furnished materials. The notice has to state the amount owed and identify the party you supplied, and it must be delivered by a method that provides third-party verification, such as certified mail or service through a U.S. marshal.3Office of the Law Revision Counsel. 40 USC 3133 – Rights of Persons Furnishing Labor or Material Miss that window and you forfeit the bond claim entirely.
Every claimant, first- or second-tier, must file suit no later than one year after the last day they furnished labor or materials. That deadline is absolute. The suit belongs in the U.S. District Court for the district where the contract was performed, regardless of the amount at stake.3Office of the Law Revision Counsel. 40 USC 3133 – Rights of Persons Furnishing Labor or Material Claims under state Little Miller Acts go to state court, and the notice requirements and deadlines will differ from the federal ones.
Payment Bond vs. Performance Bond
Payment and performance bonds are typically issued together but protect different people from different problems. The payment bond protects subcontractors, suppliers, and laborers from non-payment. The performance bond protects the project owner from the contractor’s failure to finish the work or meet contract specifications.
If a general contractor goes bankrupt mid-project, both bonds activate for different reasons. The performance bond ensures the owner can hire a replacement or recover the cost of completion. The payment bond ensures the subs and suppliers who already delivered labor and materials get paid for what they contributed before the default. The surety’s exposure on one is independent of the other, though the same surety typically issues both.
The Indemnity Agreement Contractors Sign
One point catches many contractors off guard: a surety bond is not insurance. When the surety pays out on a claim, the contractor owes the money back. Before issuing any bond, the surety requires the contractor, and usually the contractor’s individual owners and their spouses, to sign a General Indemnity Agreement. That document obligates the signers to reimburse the surety for every dollar it pays on claims, plus legal fees, investigation costs, and related expenses.
The obligation is personal. If the business fails and the surety pays $500,000 to unpaid subcontractors, the surety can pursue the individual owners for reimbursement. That’s fundamentally different from insurance, where a payout reduces the insurer’s funds but doesn’t create a debt owed by the policyholder. Contractors who treat a bond like a policy are in for an expensive surprise when a claim lands.