Everyone appreciates getting paid for the work that they do, but rarely do employers have to take out a special type of bond just to guarantee that they’ll pay their employees, subcontractors, and suppliers. This is where a Payment Bond steps in, the second type of construction bond we are exploring this week. 

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To start, what is a Payment Bond? A payment bond is a type of surety bond issued to contractors that guarantees all entities involved with the project will be paid. A payment surety bond is a legal contract, a type of bond, that guarantees certain employees, subcontractors, and suppliers are protected against non-payment. Other common names for these include "construction", and "labor and material". In government contracting, these bonds are sometimes referred to as "Miller Act Bonds".

A payment bond is one type of surety bond that most government projects require of all contractors bidding on their projects. Surety bonds are also becoming more popular on commercial projects.

A payment bond claim arises when the principal (known also as the contractor) fails to pay subcontractors, laborers, and/or suppliers. Generally the surety has the right to assert all of the principal's defenses as well as its own surety defenses --- which commonly include notice and time limitations. Notably, the bond provides recourse for only proper "claimants," so the principal and surety need to confirm the claimant has standing to pursue the claim. The project owner, or person hiring the contractor, will indemnify themselves through this type of surety bond in-case they become liable for unpaid employees, subcontractor or suppliers.

When might you need a payment bond? Payment bonds are typically used in conjunction with performance bonds and are oftentimes even on the same bond form. Contractors purchase payment bonds when negotiating a construction contract to reassure those working with them that they will be paid appropriately and on time.

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In short, as long as a contractor has clear means to pay their employees, subcontractors, and suppliers, they should be able to qualify for a payment bond. This will allow the contractor to bid on a much wider range of construction projects.