What a payment bond is and when contractors must post one
A payment bond is a may provide that a contractor will pay their suppliers, workers, and subcontractors for work done on a project. It is not insurance. It is a promise backed by a bonding company that if the contractor fails to pay, the bonding company will step in and cover those unpaid bills — up to the bond amount.
You need a payment bond when you are the project owner and you want protection against unpaid invoices piling up after the work is finished. You also need one if you are a subcontractor or supplier and you want assurance that you will be paid even if the general contractor runs out of money or disappears. The requirement to post a payment bond is often written into the contract itself, or mandated by law for public works projects.
On private projects, payment bonds are optional unless the contract says otherwise. On public projects — roads, schools, government buildings — federal and state law usually requires them. The threshold varies by state and project type, but federal projects over $150,000 typically require both a performance bond and a payment bond.
Key Takeaways
- Payment bonds are required on most public works projects and on any private project where the contract specifies one.
- The bonding company, not the contractor, pays unpaid suppliers and workers if the contractor defaults.
- Federal projects over $150,000 require payment bonds; state and local thresholds vary and should be checked before bidding.
- The bond cost is typically 1 to 3 percent of the contract value and is paid by the contractor, not the project owner.
- A payment bond protects workers and suppliers but does not protect the project owner from construction defects or incomplete work.
Public works projects and the legal requirement
Federal law requires a payment bond on any public construction project over $150,000. This is set by the Miller Act, which applies to federal contracts. The bond must be at least 100 percent of the contract price, meaning if the contract is $500,000, the bond must cover $500,000.
States have their own versions of this rule, called Little Miller Acts. Each state sets its own threshold — some require bonds on projects over $50,000, others over $100,000, and some have no threshold at all. You need to check your state's requirements before you bid or award a contract. Your state's department of transportation or public works office can tell you the exact threshold and what form the bond must take.
Local governments — cities and counties — often add their own requirements on top of state law. A city might require a payment bond on any project over $25,000, even if state law does not. Always check the project specifications and the contract documents before you commit to a bid.
Private projects where payment bonds are common
On private projects, a payment bond is not legally required unless the contract calls for one. However, many private owners and lenders demand one anyway, especially on larger jobs. A bank financing a commercial building often requires the general contractor to post both a performance bond and a payment bond as a condition of the loan.
Private owners use payment bonds to protect themselves from mechanic's liens — legal claims that suppliers and workers can file against the property if they are not paid. A payment bond does not prevent a lien from being filed, but it gives the owner a way to recover money if one is filed and the contractor does not pay it off. Some owners see the bond cost as cheaper than the risk of dealing with liens later.
Subcontractors and suppliers on private projects often ask the general contractor to post a payment bond as a condition of taking the job. This is especially common when the general contractor is new, has a thin credit history, or is working on a tight budget. The bond gives the subcontractor assurance that they will be paid even if the general contractor's cash flow dries up mid-project.
How much a payment bond costs and who pays
The cost of a payment bond is typically 1 to 3 percent of the contract value, though it can be higher or lower depending on the contractor's credit, the project type, and the bonding company's assessment of risk. A $500,000 contract might cost $5,000 to $15,000 to bond. The contractor pays this cost, not the project owner, though the contractor usually builds it into their bid.
The bonding company charges a premium based on the contractor's financial health, experience, and track record. A contractor with strong financials and a clean history pays less. A contractor with weak credit or a history of disputes pays more. Some bonding companies will not bond a contractor at all if the risk is too high.
The bond premium is a one-time cost paid upfront, usually before work begins. It is not refundable if the project is cancelled or the contract is terminated early, though some bonding companies will prorate the refund if the project ends significantly before the contract end date.
What a payment bond actually covers
A payment bond covers unpaid invoices from suppliers, workers, and subcontractors. If the general contractor does not pay a subcontractor for framing work, the subcontractor can file a claim against the payment bond and the bonding company will pay it — up to the bond amount. The same applies to a lumber supplier who delivered materials that were never paid for, or a worker whose wages were not paid.
The bond does not cover defective work, incomplete work, or disputes over whether work was done correctly. If a contractor installs a roof that leaks, the payment bond will not cover the cost of fixing it. If a contractor abandons the project halfway through, the payment bond will cover unpaid bills for work that was completed, but not the cost of hiring someone else to finish the job — that is what a performance bond covers.
To make a claim against a payment bond, the unpaid party must usually notify the bonding company in writing within a set time frame, often 90 days from the last date work was performed. The bonding company will investigate the claim and, if it is valid, pay it directly to the claimant. The contractor is still liable to the bonding company for the amount paid out.
Payment bonds versus performance bonds
A performance bond protects the project owner if the contractor fails to complete the work or does the work incorrectly. A payment bond protects suppliers and workers if the contractor fails to pay them. They are different protections for different parties.
On public projects, both are usually required together. On private projects, an owner might require only a performance bond, only a payment bond, or both. A performance bond is more expensive because it covers a wider range of risks. A payment bond is narrower and cheaper because it only covers unpaid bills.
Some contractors and bonding companies offer a combined bond that covers both performance and payment in one document. The cost is usually less than buying two separate bonds, but the coverage is the same.
When you should require a payment bond on a private project
If you are a private project owner, you should require a payment bond if the contractor is new to you, if the contract value is large, or if you are financing the project with a loan. Lenders almost always require one. You should also require one if you are concerned about the contractor's financial stability or if you want to avoid dealing with mechanic's liens after the project is done.
If you are a subcontractor or supplier, you should ask for a payment bond if the general contractor is unfamiliar to you, if the project is large, or if the general contractor's credit is weak. A payment bond costs the general contractor money, so they may resist, but it is a reasonable request and protects you from a real risk.
If you are a general contractor bidding on a project, check the specifications and contract documents to see if a payment bond is required. If it is not required but the owner or lender asks for one, factor the bond cost into your bid. Do not absorb it as a surprise cost later.
Frequently Asked Questions
Can I file a claim against a payment bond if I am a worker who was not paid?
Yes. Workers, subcontractors, and suppliers can all file claims. You will need to document the work you did or materials you supplied, show that you were not paid, and notify the bonding company within the time frame specified in the bond — usually 90 days from your last day of work. The bonding company will investigate and pay the claim if it is valid.
What happens if the bond amount is less than the total unpaid bills?
The bonding company pays claims in the order they are received, up to the bond limit. If the bond is $100,000 and there are $150,000 in valid claims, the first claimants to file will be paid in full and later claimants will receive partial payment or nothing. This is why it is important to file a claim as soon as you know you will not be paid.
Does a payment bond protect me from a mechanic's lien?
No. A mechanic's lien is a separate legal claim that a supplier or worker can file against the property. A payment bond does not prevent a lien from being filed. However, if a lien is filed and the contractor does not pay it off, the property owner can use the payment bond to recover the money they had to pay to clear the lien.
Who chooses the bonding company?
The contractor chooses and pays for the bond. The project owner or lender may specify which bonding company or which type of bond is acceptable, but the contractor is responsible for obtaining it. The bonding company must be licensed in the state where the project is located.
Is a payment bond the same as a surety bond?
A payment bond is a type of surety bond. Surety bonds are a broad category that includes performance bonds, payment bonds, bid bonds, and others. All payment bonds are surety bonds, but not all surety bonds are payment bonds.