Payment Bond

A payment bond is a surety instrument required under the Miller Act for federal construction contracts exceeding $150,000, guaranteeing that the prime contractor will pay its subcontractors, laborers, and material suppliers for work and materials furnished on the federal project.

What is a Payment Bond?

On private construction projects, unpaid subcontractors and material suppliers can file mechanic's liens against the property to secure payment. Federal government property is immune from mechanic's liens, the government cannot be forced to put a lien on the White House. The Miller Act payment bond is the legislative solution to this problem: it creates a surety-backed payment guarantee that substitutes for the lien rights subcontractors would otherwise have.

The payment bond must be equal to 100% of the contract price (same as the performance bond) and must be submitted within 10 days of contract award from a Treasury Circular 570-approved surety. Unlike the performance bond, which protects the government, the payment bond primarily protects subcontractors, laborers, and material suppliers who would otherwise have no recourse if the prime contractor fails to pay them.

Subcontractors and suppliers who have not been paid can file a claim directly against the payment bond. The Miller Act establishes specific notice and timing requirements: first-tier subcontractors (those with a direct contract with the prime) may sue on the bond after 90 days from their last furnishing of labor or materials. Second-tier subcontractors (those who contract with a subcontractor, not the prime) must provide written notice to the prime within 90 days of their last furnishing before they can sue on the bond.

Payment bond claims are separate from performance bond claims and can occur independently. A contractor may be paying subcontractors properly (no payment bond claim) but failing to meet specifications (performance bond claim), or vice versa.

Why Payment Bonds matter for government contractors

For prime contractors, payment bonds are a cost of doing federal construction business. For subcontractors and suppliers, the payment bond is the primary financial protection if the prime fails to pay. Understanding bond claim procedures and timelines is essential for anyone in the federal construction supply chain.

Example

A prime contractor holds a $9M NAVFAC utility upgrade contract and has a $9M payment bond. The prime fails to pay a roofing subcontractor's last three invoices totaling $280,000. The subcontractor, after waiting 90 days from its final day of work, files a claim against the payment bond. The surety investigates, confirms the unpaid amounts, and pays the subcontractor $280,000. The surety then seeks reimbursement from the prime under its indemnity agreement.

Frequently Asked Questions

Can a subcontractor file a payment bond claim without suing the prime?

Yes. A claim against the payment bond is made directly to the surety and does not require a lawsuit as a first step. However, if the surety disputes the claim, the claimant may need to file suit on the bond in federal district court within one year of the last furnishing.

Does the payment bond cover all unpaid subcontractors regardless of tier?

First-tier subcontractors (direct contracts with the prime) and second-tier subcontractors (contracts with a first-tier sub) can claim under the Miller Act payment bond. Third-tier subcontractors and below generally cannot claim on the Miller Act bond, though they may have state law remedies.

What is the difference between a Little Miller Act and the Miller Act?

The federal Miller Act governs federal construction contracts. Most states have enacted their own "Little Miller Acts" requiring similar payment and performance bonds on state-funded public construction projects. The specific thresholds, notice requirements, and claim periods vary by state.

Are material suppliers covered by the payment bond?

Yes. Material suppliers who furnish materials that are incorporated into the project, concrete, steel, lumber, electrical components, are covered by the Miller Act payment bond. Suppliers of equipment rented to the contractor (rather than materials consumed in the work) have more limited protection.