Finance term
Payment Bond
Also known as: labor and material bond, Miller Act payment bond
Definition
A payment bond is a surety guarantee that a general contractor will pay its subcontractors, laborers, and material suppliers on a construction project. Required alongside performance bonds on federal contracts over $150,000 under the Miller Act (40 USC 3131) and on most state public contracts under Little Miller Acts.
Detailed explanation
While a performance bond protects the project owner if the general contractor fails to complete the work, a payment bond protects the downstream supply chain — subcontractors, sub-subcontractors, laborers, and material suppliers — if the general contractor fails to pay them.
The Miller Act (40 USC 3131) requires both a performance bond and a payment bond on federal construction contracts over $150,000. The payment bond amount is typically 100% of the contract value. All 50 states have Little Miller Acts extending equivalent bonding requirements to state and local public construction contracts, though threshold amounts and scope vary by state. The SBA's Surety Bond Guarantee Program (https://www.sba.gov/funding-programs/surety-bonds) helps small and emerging contractors qualify for both performance and payment bonds by guaranteeing a portion of the bond, reducing the surety's risk and lowering the barrier to entry for smaller firms.
From a practical standpoint, subcontractors on bonded projects have direct rights against the payment bond — they can file a claim with the surety if the general contractor doesn't pay, without needing to sue the GC or the project owner directly. Deadlines for payment bond claims are strict: under the Miller Act, first-tier subcontractors must give written notice within 90 days of the last day of work if they have not been paid; second-tier parties must give notice within 90 days as well. Federal payment bond claims must be filed within one year of the last day of work.
Sources: U.S. Department of Labor Miller Act guidance at https://www.dol.gov/agencies/whd/government-contracts/mcnamara-ohara and SBA Surety Bond Program at https://www.sba.gov/funding-programs/surety-bonds.
◈ Worked example
- Federal contract: GC wins $3M federal courthouse renovation. Miller Act requires 100% payment bond ($3M). GC fails to pay framing subcontractor $180,000. Sub files payment bond claim with surety within 90-day Miller Act window. Surety pays $180,000 directly to the subcontractor.
- SBA Surety Bond Guarantee: Small contractor needs $1.5M payment bond for a state highway project but lacks the financial strength to qualify on its own. SBA guarantees 80% of the bond through the Surety Bond Guarantee Program. Surety approves the bond. Contractor pays SBA-guaranteed premium rate.
- Notice deadline missed: Specialty subcontractor finishes electrical work but hasn't received final payment. Fails to send written notice of claim within 90 days under the Miller Act. Loses payment bond claim rights — must pursue GC directly through litigation instead of the faster bond claim route.
Common questions
The most-asked questions about Payment Bond — answered straightforwardly.
What is the difference between a performance bond and a payment bond? +
A performance bond protects the project owner (obligee) if the contractor fails to complete the work. A payment bond protects subcontractors and suppliers if the contractor fails to pay them. On federal contracts over $150,000, both are required simultaneously under the Miller Act (40 USC 3131). They serve different parties and different risks — project owners primarily care about performance bonds; subcontractors primarily care about payment bonds.
How does the SBA Surety Bond Guarantee Program help small contractors? +
The SBA Surety Bond Guarantee Program (sba.gov/funding-programs/surety-bonds) allows the SBA to guarantee up to 90% of a surety bond for small contractors who can't meet traditional surety underwriting requirements. This reduces the surety's financial exposure, making it willing to bond smaller or less-capitalized contractors. The program covers bid bonds, performance bonds, and payment bonds on contracts up to $6.5M (higher for some federal projects).
Can a subcontractor file a payment bond claim without suing the GC? +
Yes — and that's the main advantage of a payment bond. A subcontractor files directly against the payment bond with the surety company, without needing to sue the general contractor or project owner first. The process is faster and less expensive than litigation. However, strict notice and filing deadlines apply under the Miller Act (90 days for notice, 1 year to file suit on the bond). Missing these deadlines forfeits bond claim rights.
Further reading
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