A payment bond protects workers and suppliers when a construction project runs out of money

A payment bond is a may provide that workers, subcontractors, and material suppliers on a construction project will get paid, even if the project owner or general contractor runs out of money or refuses to pay. The bond is issued by a surety company — a third party that promises to cover unpaid bills up to the bond amount. If the general contractor doesn't pay, the surety steps in and pays the claims.

Payment bonds are required by federal law on most government construction projects (those over $100,000 for federal work, though the threshold varies by state and local government). Private construction projects are not required to have them, but owners sometimes demand them anyway as protection. The bond is separate from the construction contract itself — it's a three-way agreement between the project owner, the contractor, and the surety company.

The cost of a payment bond is typically 1 to 3 percent of the total contract value, though this varies by the contractor's credit history, the project size, and the surety company. The contractor pays this premium, and it usually gets passed along in the project bid.

Key Takeaways

  • Payment bonds are required on most federal construction projects over $100,000 and on many state and local government projects, with thresholds that vary by jurisdiction.
  • The bond guarantees that workers, subcontractors, and material suppliers will be paid even if the general contractor or project owner runs out of money.
  • A surety company issues the bond and is legally responsible for paying valid claims if the contractor fails to pay.
  • Workers and suppliers file claims directly with the surety, not with the project owner, and must follow specific notice and timing rules that vary by state.
  • Payment bonds do not cover the project owner's losses or disputes over the quality of work — they cover only unpaid labor and materials.

How a payment bond claim actually works

If you are a worker or supplier who has not been paid, you cannot straightforward sue the project owner. Instead, you file a claim with the surety company that issued the bond. The surety will investigate whether you did the work or supplied the materials, whether the work was done correctly, and whether you followed the notice requirements in your state.

Most states require that you give written notice to the surety within a specific window — often 30 to 90 days after the last day you worked or delivered materials. This notice must include your name, the work you performed or materials you supplied, the dates, and the amount owed. If you miss this important date, you lose the right to claim against the bond, even if the work was done and you were never paid.

After you file a claim, the surety has time to investigate and respond. If the surety agrees the claim is valid, it will pay you directly. If the surety disputes the claim, you may need to pursue it further, sometimes through arbitration or court. The surety's obligation is limited to the bond amount — if multiple claims exceed that amount, they are paid proportionally.

The difference between payment bonds and performance bonds

A performance bond protects the project owner if the contractor fails to complete the work or does poor-quality work. A payment bond protects workers and suppliers if they are not paid. These are two separate bonds, and a project may have both.

On a federal construction project, the contractor is usually required to post both. The performance bond guarantees the work will be finished; the payment bond guarantees the workers and suppliers will be paid. If the contractor abandons the project, the performance bond allows the owner to hire a replacement contractor to finish the job. If the replacement contractor still doesn't pay the original workers, the payment bond covers those claims.

Who must post a payment bond

Federal law requires a payment bond on all federal construction contracts over $100,000. This includes work on federal buildings, roads, dams, military installations, and other government projects. The threshold is $100,000 for the contract value, not the project cost — a single contract for $95,000 would not require a bond, but a $105,000 contract would.

State and local governments set their own thresholds. Some states require payment bonds on all public projects over $50,000; others use $250,000 or higher. A few states have no threshold and require bonds on all public work. You can find your state's threshold by contacting your state's department of labor or construction licensing board.

Private construction projects are not required to have payment bonds under federal law, but a private owner can demand one as a condition of the contract. Some lenders also require payment bonds before they will finance a project. If a payment bond is not required and not demanded, the contractor is not obligated to post one.

What a payment bond does and does not cover

A payment bond covers unpaid wages for workers, unpaid invoices for subcontractors, and unpaid bills for material suppliers. It covers the cost of labor and materials that went into the project. It does not cover the project owner's losses if the work is late, incomplete, or poor quality — that is what the performance bond covers.

The bond also does not cover disputes over change orders, disputes over whether work meets the contract specifications, or claims that the work was defective. If a subcontractor claims it was not paid because the general contractor says the work was done wrong, the surety will investigate the quality dispute. If the surety agrees the work was defective, it may deny the claim or pay only a portion of it.

Payment bonds also do not cover the project owner directly. If the owner is owed money by the contractor for some reason, the owner cannot file a claim against the payment bond. The bond protects only those who provided labor or materials to the project.

Notice requirements and important date that vary by state

Every state has different rules about how and when you must notify the surety of a claim. Some states require notice within 30 days of the last day you worked; others allow 90 days. Some require the notice to be sent by certified mail; others accept email. Some require you to notify the general contractor separately before notifying the surety.

Federal projects are governed by the Miller Act, which requires notice within 90 days of the last day you worked or supplied materials. The notice must be in writing and must be sent to the surety, the general contractor, and the project owner. If you miss this important date, you lose your right to claim against the bond.

For state and local projects, check your state's prompt payment law or construction lien law — these statutes set the notice rules. Your state's department of labor or construction licensing board can tell you the exact requirements. If you are unsure whether you have met the important date, contact the surety company listed on the bond and ask.

What happens if the surety denies your claim

If the surety denies your claim, you have options, but they depend on the reason for the denial and your state's law. If the surety says you missed the notice important date, you generally cannot recover — the important date is strict and the surety is not required to extend it. If the surety denies the claim on the merits — saying the work was defective or the invoice is inflated — you may be able to pursue the claim through arbitration or court.

Some states allow you to sue the surety directly if it wrongfully denies a claim. Other states require you to go through arbitration first. A few states allow you to sue the general contractor in addition to or instead of the surety, though the contractor may have no money left. An attorney who handles construction disputes in your state can advise you on your options.

The key is to act quickly. Most states have a statute of limitations on payment bond claims — often one to two years from the date you last worked or supplied materials. If you wait too long, you may lose the right to recover even if the surety wrongfully denied your claim.

How to learn about a project has a payment bond

For federal projects, the bond information is public. You can ask the general contractor, the project owner, or the federal agency overseeing the project for a copy of the bond. The bond document will list the surety company's name, address, and the bond amount. Federal projects are also listed on SAM.gov (the System for Award Management), where you can sometimes find bond information.

For state and local projects, ask the general contractor or the government agency managing the project. The bond information may be filed with the state or local government and available through a public records request. Some states post bond information on their department of labor or construction licensing board website.

For private projects, ask the general contractor directly. The contractor is not required to post a bond unless the owner demanded one in the contract, so you may need to check the contract to see whether a bond is required. If you are a worker or supplier and you have not been paid, ask the general contractor for the name and contact information of the surety — the contractor is usually required to provide this information.

Frequently Asked Questions

Can I file a claim against a payment bond if I was paid late but eventually got paid?

No. A payment bond covers unpaid amounts, not late payments. If you were eventually paid in full, you have no claim against the bond. However, if you were paid only part of what you were owed, you can claim the unpaid balance.

What if the general contractor says the surety will not pay because the work was defective?

File a claim with the surety anyway. The surety will investigate whether the work was actually defective and whether the defect is serious enough to justify withholding payment. If you believe the work meets the contract specifications, provide documentation — photos, inspection reports, or written approval from the project owner. The surety must make a reasonable decision based on the evidence.

Do I need a lawyer to file a payment bond claim?

You can file a claim yourself if you follow the notice requirements and provide clear documentation of the work and the amount owed. However, if the surety denies your claim or disputes the amount, a lawyer who handles construction disputes can help you pursue it further. Some lawyers work on contingency for payment bond claims, meaning you pay only if you recover.

What if multiple workers or suppliers have claims and the bond amount is not enough to pay everyone?

The surety will pay claims in the order they are received, up to the bond limit. Once the bond is exhausted, later claimants may receive nothing from the bond. However, they may still be able to sue the general contractor directly, though the contractor may have no money. Some states have a priority order for payment bond claims — for example, workers' wages may be paid before supplier invoices.

Can the project owner file a claim against the payment bond?

No. The payment bond protects only workers, subcontractors, and material suppliers. The project owner is protected by the performance bond, which covers incomplete or defective work. If the owner has a dispute with the contractor over money, that is a contract dispute, not a payment bond claim.