A payment bond is a type of contract surety bond. It’s a 3-way guarantee between a Contractor (Principal), Owner or Higher Tier Contractor (Obligee) and a Surety (Bond Company). Payment bonds guarantee that suppliers and subcontractors will be paid. If they are not, they can file a claim against the payment bond. The payment bond is meant to protect both public and private work from mechanic’s liens. Typically, payment bonds are issued together with performance bonds but some Obligees will ask for a payment bond only.
The Miller Act requires payment bonds equal to 100% of the contract amount to be issued on all Federal construction projects over $150,000. Most states and municipalities have adopted “Little Miller Acts” that require payment bonds on state and local projects as well. Because liens cannot be placed on public work, the payment bond in combination with the performance bond provide a means for protecting the project from mechanics liens of subcontractors and suppliers.
Additionally, private owners may require payment bonds on their projects to keep them lien free as well. Also, Contractors may require performance bonds and payment bonds from their subcontractors to ensure that the work gets completed and their subcontractors and suppliers get paid.
The payment bond is intended to protect all persons supplying material and labor for the bonded contract but, that is not the case. Those with right under a standard payment bond include:
The items that can be covered by a payment bond are virtually endless. Courts have ruled that under The Miller Act, the supplier only needs to demonstrate that it is, “reasonably believed” that materials were to be used in the project to have protection under the payment bond. In additional to labor and material, some of the items that have been covered under payment bonds include: