Payment Bond
A surety bond guaranteeing that a contractor will pay subcontractors, laborers, and material suppliers on a construction project.
What It Is
A payment bond is a contract surety bond that guarantees the bonded contractor will pay all subcontractors, laborers, and material suppliers who provide work or materials on the bonded project. Payment bonds serve as a substitute for mechanic's lien rights on public projects, where liens cannot be placed against government-owned property.
Payment bond claimants have specific notice and timing requirements that vary by jurisdiction. Under the federal Miller Act, first-tier subcontractors (those contracting directly with the general contractor) can make claims without prior notice, while second-tier claimants (sub-subcontractors and suppliers to subs) must provide written notice within 90 days of their last work.
Payment bonds are typically issued alongside performance bonds and share the same penal sum amount, though they are separate obligations.
Why It Matters for Brokers
Payment bond claims are among the most frequent surety claims. Brokers must understand the notice requirements because advising a subcontractor client on payment bond claim procedures is a common service request. Additionally, brokers placing surety bonds for general contractors need to understand that frequent payment bond claims against their client will damage the client's surety relationship and bonding capacity.
Real-World Example
A mechanical subcontractor completes $480K of HVAC work on a bonded public school project. The general contractor fails to pay despite multiple invoices. The subcontractor makes a payment bond claim, providing documentation of the contract, completed work, and unpaid invoices. The surety investigates, confirms the work was performed and payment is owed, and pays the subcontractor. The surety then pursues the general contractor for reimbursement under the indemnity agreement.
Common Mistakes
- 1Missing the statutory notice deadlines for payment bond claims — second-tier claimants under the Miller Act must give notice within 90 days of last furnishing labor or materials.
- 2Not verifying that the claimant has proper standing to make a payment bond claim — payment bonds typically cover only first and second-tier claimants, not third-tier and below.
- 3Confusing payment bond rights with mechanic's lien rights, which have different notice requirements, deadlines, and remedies.
How brokerageaudit.com Handles This
Document Processor extracts payment bond details including penal sum, covered project, and obligee information. The system helps brokers track payment bond claim deadlines and notice requirements based on the project's jurisdiction and applicable statute.