Payment Bonds: What are they? Who do they protect?
Payment bonds guarantee payment to subcontractors and suppliers for labor and materials provided. Payment bonds are required on public jobs and can be required on private jobs to prevent labor and material suppliers from putting a mechanic’s lien on the property. Payment bonds are required on federal projects over $100,000 for protection of the 1st and 2nd tier subcontractors and suppliers who don’t have the same rights to put a mechanic’s lien on public property.
Payment bonds are generally issued in tandem with a performance bond and are a contractual agreement between the obligee (owner of the project), the principal (contractor needing the bond), and the surety company who is taking the risk. If a contractor fails to pay the subcontractors, or suppliers, a claim can be made on the bond by those parties. The surety bond company will then step in and resolve any legitimate claims.
Need a payment bond?
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