Payment Bond

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Payment bonds are used to join three parties. The oblige, also known as the project owner, this is the person who may want, or in the case of a commercial project or publicly funded project, be required have a payment bond in use during a project. Secondly would be the principal, this would be the contractor who actually purchases the payment bond. Depending on the projects the contractor bids on, this may be a requirement of the bid to ensure that both the material supplier and sub-contractors are paid. The third party involved in a payment bond would be the surety. This would be the company that issues the bond, thus ensuring that everyone involved in the project under the contractor is paid, should the contractor fail to follow through on his job.

Payment bonds are required on federal or government projects over $100,000 per the Federal Miller Act, however cannot be used on projects below this amount. Privately managed projects may also opt to use payment bonds as well, though not required, to ensure that subcontractors are paid, as are materials used in the construction of their projects are paid for. A payment bond is quite similar to a mechanics lien in that if a contractor does not pay his subcontractors of pay for his materials in a timely fashion, rather than the project owner worrying about the workers having cause to quit, a third party, the surety, will step in and guarantee payment.

Due to the nature of payment bonds, they can be hard for some contractors who have bad credit or other financial issues to obtain.