Payment Bond

A payment bond is a three-party guarantee: a surety company promises that if the bonded contractor (the principal) fails to pay its subcontractors and suppliers on a project, the surety will. On public projects — federal work under the Miller Act and state work under little Miller Acts — payment bonds are mandatory precisely because public property cannot be liened; the bond replaces the mechanics lien as the unpaid supplier's security. Bonds also appear on private projects when owners require them or when GCs bond off a filed lien to clear title.

For a credit manager, a bonded project changes the underwriting. Your practical recourse is no longer your customer's balance sheet or the real estate; it is a claim against a surety — typically a large, rated insurance company. That is strong protection, but only for claimants within the bond's coverage (usually first- and second-tier subcontractors and suppliers; sub-sub-suppliers too remote in the chain may be excluded) and only if claim mechanics are followed: the Miller Act, for example, requires second-tier claimants to give written notice to the GC within 90 days of last furnishing, and suit within one year. State bond statutes impose their own notice and suit windows.

Operational takeaways: identify bonded projects at order entry and obtain a copy of the bond early (public agencies must provide it; waiting until a default makes everything harder), calendar last-furnishing dates because notice windows run from them, and treat bond claims with the same deadline discipline as lien filings. A valid claim against a solvent surety is among the best positions an unpaid construction creditor can hold — and an untimely one is worth nothing.