A payment bond is a financial guarantee, issued by a surety company, that the bonded contractor will pay all subcontractors and material suppliers on a specific project. If the contractor fails to pay, the surety steps in and pays the unpaid claimants from the bond amount. Federal public works projects over $150,000 require both performance and payment bonds under the Miller Act. State and local public works typically have parallel "Little Miller Act" bond requirements. Many private commercial projects also require bonds at the owner's discretion.
Bonds protect the owner and the lower tier of the project. Payment bonds in particular protect subs and suppliers because they cannot file mechanics liens against public property. The bond is the substitute lien right. Bond claims have specific notice and filing deadlines (often 90 days from last work for first-tier subs, 90 days for material suppliers giving notice to the GC, then suit within 1 year). Missing the deadline forfeits the claim. Always verify bond requirements at bid time and price the bond cost (typically 0.5 to 3% of contract value) into the bid.