Payment Bond
Also known as: Labor and Materials Bond
Required on public-works projects under the federal Miller Act and most state Little Miller Acts. Protects sub-contractors from non-payment by the prime contractor.
Real-world scenario
Cardinal Construction LLC, a mid-size general contractor in Ohio, wins a $4,200,000 contract to build a new public elementary school. Because it is a state-funded project over the $50,000 threshold, Ohio's "Little Miller Act" requires Cardinal to post both a performance bond and a payment bond at 100% of the contract price — so $4,200,000 of penal sum apiece. Cardinal's surety, rated A (Excellent) by AM Best, charges a single tiered premium on the contract amount that covers both bonds: 2.5% on the first $100,000 and 1.5% on the balance. That works out to $2,500 plus $61,500, or $64,000 total, of which about $32,000 is attributable to the payment bond.
Nine months in, Cardinal's drywall subcontractor completes $340,000 of work but goes bankrupt owing $88,000 to its material supplier and $46,000 in unpaid wages to its crew. Those unpaid parties — who cannot lien public property — instead file claims against Cardinal's payment bond. The surety validates $88,000 to the supplier and $46,000 to the laborers, paying out $134,000 in claims, plus $9,500 in claims-adjustment and legal review costs, for $143,500 total.
Because a payment bond is a form of credit (not insurance), Cardinal must reimburse the surety in full under its indemnity agreement. Cardinal repays the entire $143,500 over 18 months. Its next renewal rate rises from 1.5% to 1.9%, adding about $12,600 to the following year's bonding cost on roughly $3,150,000 of new bonded work — a manageable price for keeping its $8,000,000 aggregate bonding line intact.
How it affects your premium
A payment bond is a form of contract surety, so its premium is a service fee for the surety's guarantee and its assessment of your credit — not a pooled insurance rate. These factors drive what you pay:
- Contract (penal) size: Premium is a percentage of the bonded amount, so a $4.2M job costs far more than a $200K job even at the same rate.
- Personal and business credit: The contractor's credit score, working capital, and bank line are the biggest levers; strong credit earns rates near 1%, weak credit can push toward 3%+.
- Contractor financial statements: CPA-reviewed or audited statements, positive net worth, and healthy work-in-progress schedules lower the rate.
- Rate tiering by band: Sureties charge a higher percentage on the first $100K-$500K, then step down, so blended rates fall as contract size grows.
- Project type and obligee: Public jobs under a Miller Act bond requirement, subcontractor-heavy scopes, and long durations raise perceived exposure.
- Indemnity and collateral: Broad personal/corporate indemnity or posted collateral reduces the surety's risk and can trim the rate.
- Bonding capacity used: How much of your single-job and aggregate bonding line the project consumes affects both approval and pricing.
Common misconceptions
Myth: A payment bond protects me, the contractor who buys it.
Reality:
It protects your subcontractors, laborers, and material suppliers — not you. The bond guarantees they get paid, and you must reimburse the surety for any claim under your indemnity agreement.
Myth: A payment bond and a performance bond are the same thing.
Reality:
They are separate bonds usually sold together. A performance bond guarantees the project is completed per contract, while a payment bond guarantees downstream parties get paid.
Myth: A payment bond is a type of insurance that absorbs my losses.
Reality:
It is a three-party surety bond, essentially a line of credit. Unlike insurance, every dollar the surety pays out is recoverable from you.
Frequently asked questions
When am I legally required to carry a payment bond?
On most public construction projects above a statutory threshold. Federal jobs over $150,000 require one under the Miller Act, and states have their own "Little Miller Act" limits, often between $25,000 and $100,000.
How much does a payment bond cost?
Typically 0.5% to 3% of the contract amount, priced on your credit and financials. A contractor with strong credit on a $1,000,000 job might pay around $10,000 for the payment bond.
Who can file a claim against my payment bond?
Subcontractors, laborers, and material suppliers who worked on the project and were not paid. On public work they cannot lien the property, so the bond is their remedy — often with a strict notice deadline of 90 days.
Do I have to repay the surety if it pays a claim?
Yes. Under your indemnity agreement you must reimburse the surety in full for the claim plus its legal and adjustment costs, which is why a bond is treated as credit rather than insurance.
Can I get a payment bond by itself?
It is technically a standalone bond, but sureties and public obligees almost always require it paired with a performance bond, and both are typically underwritten and issued together.
Sources cited
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