Payment Bonds

What is a payment bond?

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.

Who needs payment bonds?

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.

Who is covered by a payment bond?

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:

 

  • First-Tier Subcontractors – This includes all subcontractors that have a contract directly with the Principal

 

  • Second -Tier Subcontractors – All subcontractors who have a contract with the First-Tier Subcontractors

 

  • First-Tier Material Supplier – All material suppliers who contracted directly with the Principal

 

  • Some Second-Tier Material Supplies – All material suppliers who contracted directly with a First-Tier Subcontractor

What is covered by a payment bond?

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:

 

  • Rental Equipment

 

  • Fuel, oil, tires and repairs which were used in equipment for the project

 

  • Tools used for the project

 

  • Taxes for the project

 

  • Delay costs

 

  • Many others