Bond Type Guide

Payment Bonds

Guarantees your subs and suppliers get paid on time.

100%
Payment bond amount on public projects — almost always equals the full contract value

What is a Payment Bond?

A payment bond guarantees that you'll pay the people who work on your project. Your subcontractors, your material suppliers, your equipment rental companies — everyone down the chain. If you don't pay them, they can file a claim against the bond and get compensated.

The structure is the same three-party setup as every surety bond. You're the principal (the general contractor). The project owner is the obligee (the entity requiring the bond). And the surety backs the guarantee.

But here's the twist: the people the payment bond actually protects aren't the project owner — they're the subcontractors and suppliers. The project owner requires the bond, but the downstream workers are the ones who benefit from it.

Why does this exist? Because on public projects, subcontractors can't file mechanic's liens against government property. On a private job, if a sub doesn't get paid, they can put a lien on the building. On a public job, they can't — it's a government building. The payment bond replaces that lien right with a financial guarantee.

If a valid claim is filed, the surety pays the claimant and then comes after you for repayment. You signed an indemnity agreement that makes you personally responsible. The surety is not absorbing the loss — you are.

Who needs one?

General contractors on public construction projects. The Miller Act (1935) requires payment bonds on all federal construction contracts over $150,000. Most states have similar laws — "Little Miller Acts" — that extend the requirement to state and municipal projects.

General contractors on larger private projects. Some private project owners require payment bonds on large commercial contracts ($500K+) as a way to prevent lien claims against their property. A payment bond keeps the owner's building lien-free by giving subs and suppliers an alternative remedy.

Subcontractors bonding their own subs. On very large projects, a general contractor may require first-tier subcontractors to provide their own payment bonds, protecting second-tier subs and suppliers further down the chain.

Specific industries:

  • General contractors and construction managers on public work
  • Heavy civil and highway contractors
  • Mechanical, electrical, and plumbing contractors (on bonded projects)
  • Federal and military construction contractors
  • School, hospital, and municipal building contractors

If you're bidding on public work, you need a payment bond. It's not optional. The bid documents will spell it out, usually alongside the performance bond requirement.

What does it cost?

Payment bonds are almost always purchased alongside performance bonds, and most sureties price them as a package. The combined premium for both bonds typically runs 1-5% of the contract value. Some sureties charge a small additional premium for the payment bond on top of the performance bond rate — usually 0.5-1% extra.

Key cost factors:

  • Credit score: The single biggest factor. Contractors with scores above 720 get the best combined rates. Below 640, expect surcharges.
  • Contract size: Larger projects mean more risk and potentially more subcontractors to cover.
  • Project type: Projects with heavy subcontractor involvement (like commercial buildings) carry more payment bond risk than projects done mostly by the GC's own forces.
  • Your payment history: Sureties look at how you've historically paid your subs and suppliers. Slow-pay patterns raise red flags.

Example: On a $1 million public project requiring both performance and payment bonds, a contractor with excellent credit might pay $15,000-$25,000 total for the bond package. A contractor with fair credit on the same project might pay $30,000-$50,000.

Your broker takes 25-30% of that premium as commission. On a $20,000 bond package, that's $5,000-$6,000 to the broker. And this resets on every project — same paperwork, same underwriting, same commission.

How do you qualify?

Since payment bonds and performance bonds are almost always issued together, the qualification process is identical. Sureties evaluate five core areas:

1. Personal credit score
First checkpoint. Scores above 720 put you in the best programs. Between 680-720, you'll qualify with most standard carriers. Below 640, you're in specialty market territory with higher premiums.

2. Business financial statements
Balance sheet, income statement, and cash flow statement. For bonds over $500K, CPA-prepared or audited financials are usually required. The surety focuses on working capital, net worth, and whether your business is generating positive cash flow.

3. Work-in-progress (WIP) schedule
A breakdown of every active project: contract value, costs incurred, estimated costs to complete, and billing status. The surety wants to know two things: are you overextended, and are you getting paid on your current jobs?

4. Payment track record
This is especially relevant for payment bonds. Do you pay your subs and suppliers on time? Any history of slow payments, disputes, or payment bond claims will make underwriters nervous. References from key subcontractors and suppliers can help.

5. Industry experience
Three to five years of experience completing projects similar in size and scope to the one you're bonding. The surety needs to know you can manage the cash flow of a project this size — paying subs on time while waiting for owner payments is a cash flow challenge many contractors underestimate.

Cash flow is king for payment bonds. Unlike performance bonds (where the surety worries about you finishing the work), payment bonds are about money management. Can you collect from the owner and pay your subs without running out of cash? Sureties look hard at your accounts receivable aging and payment patterns.

State requirements

Payment bond requirements mirror performance bond requirements in most cases — they're required together on public projects:

  • Federal projects: The Miller Act requires payment bonds on all federal construction contracts over $150,000. The bond amount equals the full contract value.
  • State projects: "Little Miller Acts" apply in most states, with varying thresholds. The payment bond amount usually equals 100% of the contract value, though some states allow lower amounts.
  • Claim filing deadlines: These vary significantly. Federal law gives 90 days for second-tier claimant notice and one year for suit. State laws range from 60 days to 6 months for notice, with suit deadlines between 6 months and 2 years.
  • Private projects: No state requires payment bonds on private work, but many private owners require them contractually on larger projects.

The claim procedures under payment bonds are complex and time-sensitive. Subcontractors and suppliers should consult the specific statute (federal or state) for exact notice and filing requirements. See our glossary for more on the Miller Act and mechanic's liens.

Common questions

How much does a payment bond cost? +
Payment bond premiums typically run 1-5% of the bond amount per year. On most public construction projects, the payment bond equals 100% of the contract value. So on a $500,000 contract, expect to pay $5,000 to $25,000. Payment bonds are usually purchased alongside performance bonds, and many sureties bundle the two at a combined rate rather than charging separately.
What happens if I don't pay my subs or suppliers? +
If you fail to pay your subcontractors or material suppliers, they can file a claim against your payment bond. The surety investigates the claim, and if it's valid, pays the claimant. Then the surety comes after you for full reimbursement through your indemnity agreement. Beyond the financial hit, a payment bond claim damages your bonding history and makes future bonds more expensive and harder to get.
Who can file a claim on a payment bond? +
First-tier subcontractors and material suppliers who have a direct contract with you (the general contractor) can always file claims. Second-tier subs and suppliers — those hired by your subcontractors — can usually file claims too, but the rules vary. On federal projects under the Miller Act, second-tier claimants must give written notice within 90 days of their last work. State laws have their own timelines and rules.
Do I need a payment bond for every project? +
Not every project. Payment bonds are required on federal construction projects over $150,000 (Miller Act), on most state-funded projects (Little Miller Acts), and on some larger private projects. Private project owners sometimes require them on contracts over $500K as an alternative to mechanic's lien rights. If the bid documents or contract don't mention a payment bond, you probably don't need one.
What's the difference between a payment bond and a performance bond? +
A performance bond guarantees you'll finish the project. A payment bond guarantees you'll pay the people who helped you do it — your subcontractors and material suppliers. They protect different parties: the performance bond protects the project owner, the payment bond protects the downstream workers and suppliers. On public projects, you almost always need both.
Why do public projects require payment bonds instead of mechanic's liens? +
You can't put a lien on a government building. Public property is exempt from mechanic's liens in every state. Without liens as a remedy, subcontractors and suppliers on public projects would have no way to guarantee payment. Payment bonds fill that gap — they give downstream parties a financial remedy when they can't file a lien against the property itself.
Can I get a payment bond with bad credit? +
Yes, but expect to pay more. Since payment bonds are usually paired with performance bonds, the underwriting process is the same — your credit score, financial statements, experience, and project details all get evaluated. Contractors with credit below 640 can get bonded through specialty surety programs at 5-15% premiums. The SBA Bond Guarantee Program is another option for small and emerging contractors.
How long can someone wait to file a payment bond claim? +
On federal projects (Miller Act), subcontractors with a direct contract with the GC have up to one year from their last day of work. Second-tier subs and suppliers must give notice within 90 days and file suit within one year. State deadlines vary — some give as little as 60 days for notice and 6 months to file suit. The clock starts ticking from the last date of work or last material delivery, not from when the invoice was due.

What most sites won't tell you

Here's what most bond sites won't tell you about payment bonds:

The biggest risk with payment bonds isn't a rogue sub filing a bogus claim. It's cash flow timing. You finish the work, you submit a pay application, you wait 30-60-90 days for the owner to pay you — and meanwhile your subs and suppliers are expecting their checks. If the owner is slow, you're floating the entire project out of your own pocket. And if you can't float it, claims start flying.

This is the scenario sureties are actually underwriting. It's not about dishonesty — it's about liquidity. A contractor with excellent skills but thin cash reserves is a payment bond claim waiting to happen. And once a claim hits your record, your bonding capacity drops and your premiums go up. One bad project can spiral.

What brokers rarely discuss: The relationship between your payment bond and your line of credit. A strong bank line of credit is your best defense against payment bond claims — it covers the gap when owner payments are slow. If your broker isn't asking about your banking relationship, they're not doing a complete job.

Also worth knowing: payment bond claims are more common than performance bond claims. It's easier for a sub to prove they weren't paid (they have invoices) than for an owner to prove a project wasn't completed properly. If you carry payment bonds regularly, your claims exposure is real. Manage your payables like your bonding depends on it — because it does.

Related bond types

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Performance Bonds

Guarantees you'll finish the job you promised to do.
📈

Bid Bonds

Proves you're serious when you submit a project bid.
📄

License Bonds

Required by your state to legally operate your business.

Want to learn more about how bonds work? Read our complete guide.