We picked up a school district roof replacement job, NAICS 238160. It's a firm-fixed-price contract. They asked for a performance and payment bond. I have always focused on the performance side, making sure we get the work done right and on time. My old man always said the performance bond protects the owner if we screw up the job. What about the payment bond? We're a small outfit, and I'm stressing about cash flow and making payroll on this one. If I hit a rough patch and can't pay a sub or a supplier, does the payment bond protect them? Who does the payment bond protect? If a sub or supplier makes a claim, how does that work? What are the deadlines for them to give notice? And if the surety pays, do they come after me and my company for the money?
What is a payment bond, and does my sub get paid by the surety if I run out of money mid-job?
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A payment bond protects the subcontractors and suppliers on a job by guaranteeing they will be paid if the prime contractor defaults. Your old man was right about the performance bond protecting the owner, and the payment bond is similar but for the subs and suppliers. For federal construction contracts, the Miller Act requires performance and payment bonds for any construction contract exceeding a certain amount, as defined in FAR 28.102-1(a). For state and local projects, the requirements depend on state law and local regulations.
If you run into a cash flow issue and cannot pay a subcontractor or a supplier, they can make a claim against the payment bond. The surety company, which issued the bond, then investigates the claim. If the claim is valid, the surety pays the subcontractor or supplier directly. The surety then seeks reimbursement from your company, as you and your company are typically indemnifying the surety when the bond is issued. This means the surety can and will come after you and your company for any money they pay out on your behalf. Subcontractors and suppliers usually have specific deadlines, often 90 days from the last day they furnished labor or materials, to give written notice to the prime contractor and the surety.
The payment bond protects your subs and suppliers on a school district job, but your specific state law and the school district’s own purchasing rules will define the exact thresholds and notification requirements. Luis is right about the federal rules, but your school district contract is not a federal buy. For state and local projects, the requirements for payment bonds, including the amounts and claim procedures, are set by the state or local government. These often mirror the federal Miller Act but can have different dollar thresholds or notice periods for claims. The surety company will definitely come after you for any money they pay out on a claim because you sign an indemnity agreement when you get the bond.
A payment bond protects the people who furnish labor and material on the job, not the district. If you stop paying a sub or supplier, they file a claim on the bond, the surety investigates, and if it pays, it comes straight back to you under the indemnity agreement you signed to get bonded. On a small outfit that agreement almost always includes you personally, so read it.
One correction on the notice point above. Under the Miller Act, 40 U.S.C. 3133(b), a sub or supplier who contracted directly with you doesn't send any notice. They can sue on the bond once 90 days have passed since their last labor or material. Only the second tier, someone who contracted with your sub, has to give you written notice within 90 days. Anyone below that tier isn't covered. Suit has to be filed within one year after the last labor or material.
Your job is a school district though, so the Miller Act doesn't govern it. State law does. On our ISD jobs here in Texas it's Government Code Chapter 2253, and its notice deadlines run off the month the unpaid work was done, which is a different clock from the federal 90 days. Pull your state's public works bond statute and read the claim section before you mobilize.
What's helped us on cash flow is calling the surety the minute a payment to a sub is going to be late. They'd much rather hear it from you than from a claim letter.