What a payment bond is and who needs one
A payment bond is a may provide that a contractor will pay their suppliers, workers, and subcontractors. It is not insurance and it is not a loan. It is a three-party agreement: the contractor (the one doing the work) buys the bond from a bonding company, and that company promises to pay the people the contractor owes money to if the contractor fails to pay.
Payment bonds are required on most public construction projects—federal, state, and local government work. Private projects rarely require them unless the property owner or lender specifically demands one. If you are a general contractor bidding on a government job, or a subcontractor working on one, you will almost certainly need to understand how payment bonds work and how to obtain one.
The bond protects workers and suppliers. If a contractor goes bankrupt or simply refuses to pay, the bonding company steps in and covers the debt. This is why payment bonds exist: to keep the supply chain moving and to protect people who cannot afford to wait months for payment while a contractor's finances are sorted out.
Key Takeaways
- Payment bonds are required on most public construction projects and are purchased by the contractor from a bonding company, not by workers or suppliers.
- The bonding company charges a premium (usually 1 to 3 percent of the contract value) and conducts a financial review of the contractor before issuing the bond.
- To obtain a payment bond, you need a completed contract or bid, financial statements, and proof of experience in similar work.
- If a contractor fails to pay, workers and suppliers can file a claim against the bond, but the process requires documentation and often a lawyer.
- Payment bonds are different from bid bonds (which may provide you will sign a contract if you win the bid) and performance bonds (which may provide you will finish the work).
Who buys the payment bond and when
The contractor
The bond must be in place before work begins on a public project. On federal projects, the Miller Act requires a payment bond equal to 100 percent of the contract price. Most states have similar laws for state and local government work, though the percentage and exact rules vary by state. Private projects have no legal requirement unless the owner or lender writes it into the contract. The contractor typically obtains the bond as part of the bidding process. They contact a surety company (a bonding company), provide financial information, and pay a premium. The surety then issues the bond, which the contractor submits with their bid or before signing the contract. A surety company will ask for several pieces of information before issuing a payment bond. The exact list depends on the surety and the size of the project, but expect to provide: The surety uses this information to assess the risk of bonding the contractor. They want to know whether the contractor has the financial strength and experience to complete the work and pay everyone involved. A contractor with weak financials, no relevant experience, or a history of payment disputes will either be denied a bond or offered one at a much higher premium. If you are a subcontractor or supplier and the general contractor has not obtained a payment bond, you can ask to see proof of the bond. Most public projects require the bond to be posted on site or filed with the project owner. If no bond exists on a public project, report it to the project owner or the government agency overseeing the work. The cost of a payment bond is called the premium, and it is a percentage of the total contract value. The premium typically ranges from 1 to 3 percent, though it can be higher for riskier contractors or smaller projects. A $500,000 contract might cost $5,000 to $15,000 to bond, depending on the surety's assessment of the contractor's risk. Several factors affect the premium rate. A contractor with strong financials, a long track record, and no payment disputes will pay a lower rate—often closer to 1 percent. A newer contractor or one with weak cash flow might pay 2 to 3 percent or higher. The size of the project matters too: smaller projects sometimes carry higher premiums because the surety's administrative cost is the same regardless of contract size. The contractor pays the premium, not the workers or suppliers. It is a business cost that the contractor factors into their bid. In some cases, a contractor may try to pass the cost to subcontractors by reducing their payments, but this is a negotiation between the contractor and the subcontractor, not a direct cost to the worker. If you are a contractor bidding on a public project that requires a payment bond, follow these steps: If you are denied a bond or offered one at a rate you think is too high, you can apply to a different surety. Rates and underwriting standards vary, and a second opinion may result in better terms. If you are a worker, supplier, or subcontractor and the contractor has not paid you, you can file a claim against the payment bond. This is called a bond claim or surety claim. The process varies slightly by state and by surety, but the general steps are: First, notify the contractor in writing. Send a letter (email is acceptable, but certified mail is safer) stating what you are owed, when payment was due, and that you expect payment within a specific timeframe—usually 10 to 30 days. Keep a copy of this letter. Second, gather documentation. Collect your contract or purchase order, invoices, delivery receipts, timesheets, and any correspondence about the work or payment. The surety will ask for all of this. If you do not have a written contract, gather whatever proof you have that you performed the work or supplied materials. Third, contact the surety. Find the surety company name on the bond (it should be posted on the job site or available from the project owner). Call or write to report the non-payment and request a claim form. The surety will ask for your documentation and may ask questions about the work and the payment dispute. Fourth, file the claim formally. Submit the completed claim form and all supporting documents to the surety. Include a cover letter explaining what you are owed and why. Keep copies of everything you send. The surety will investigate the claim. If they find merit, they will typically contact the contractor and demand payment. If the contractor still does not pay, the surety will pay you directly, up to the bond amount. The surety then pursues the contractor for reimbursement. This process can take weeks or months. If the surety denies your claim or delays unreasonably, you may need to consult a lawyer who handles construction disputes. Many states have laws that give workers and suppliers additional rights beyond the bond itself, such as mechanic's liens. Three types of bonds are common in construction: payment bonds, bid bonds, and performance bonds. They serve different purposes and protect different parties. A bid bond guarantees that if you win the bid, you will sign the contract and provide the required bonds. It protects the project owner from contractors who bid low and then back out. The bid bond is usually small—often 5 to 10 percent of the bid amount—and is released once you sign the contract. A performance bond guarantees that you will complete the work according to the contract terms. If you abandon the job or fail to finish it properly, the surety will hire another contractor to complete the work or pay the difference in cost. The performance bond protects the project owner. A payment bond guarantees that you will pay your workers, suppliers, and subcontractors. It protects the people you owe money to, not the project owner. On public projects, you typically need all three: a bid bond, a performance bond, and a payment bond. The bid bond is released when you sign the contract; the performance and payment bonds remain in place for the duration of the project and sometimes for a period afterward. No. Only the general contractor or prime contractor can obtain a payment bond. If you are a subcontractor or supplier, you rely on the general contractor's bond. If the general contractor has not obtained one on a public project, report it to the project owner or the government agency overseeing the work. Surety companies are regulated and must maintain reserves to cover claims. If a surety fails, the state insurance commissioner steps in and ensures that valid claims are paid. Your claim does not disappear; it is transferred to the state's guaranty fund or another surety. This is rare, but it is why sureties are regulated. It is harder, but not impossible. You may need to provide additional collateral, such as a personal may provide from an owner or a letter of credit from your bank. You will likely pay a higher premium. Some sureties specialize in contractors with weaker financials; it is worth shopping around. On most projects, the payment bond remains in effect for the duration of the contract plus a period afterward—often one to two years. This allows workers and suppliers time to file claims if they discover they were not paid. The exact period depends on the contract and state law. Ask the project owner, the general contractor, or the project manager for the bond information. On public projects, the bond is usually filed with the government agency and is public record. You can also contact your state's construction board or licensing agency; they may have records of bonds filed for that project.Documents and financial information needed to obtain a payment bond
How much a payment bond costs
Steps to obtain a payment bond as a contractor
How to file a claim if a contractor does not pay
Payment bonds versus bid bonds and performance bonds
Frequently Asked Questions
Can a subcontractor or supplier get a payment bond?
What happens if the surety company goes out of business?
Can I get a payment bond if I have bad credit or weak financials?
How long does a payment bond stay in effect?
What if I was not paid and I do not know the surety company's name?