Performance Bonds and Payment Bonds: What Every Sub Should Know

On public works projects, bonding is typically required by statute. The Miller Act (federal) and "Little Miller Acts" (state equivalents) require contractors on public projects above certain thresholds to furnish both performance bonds and payment bonds. For subcontractors, understanding how each bond works — and the rights they create — is essential for protecting your payment and managing your own bonding obligations.

Payment Bonds: Your Safety Net

A payment bond guarantees that the GC's subcontractors and suppliers will be paid. If the GC fails to pay you, you can make a claim directly against the GC's payment bond surety.

Critical rules for subcontractors: - Timing matters. On federal projects, you must file a claim within 90 days of your last day of work. State deadlines vary. - Notice requirements. If you don't have a direct contract with the GC (second-tier sub or supplier), you must typically provide preliminary notice to the GC within a specified period. - You can't lien public property. Unlike private work, you can't file a mechanic's lien on a public building or road. The payment bond is your equivalent remedy.

The payment bond is the single most important protection subcontractors have on public work. Know the deadlines and follow them precisely.

Performance Bonds: Your Obligation

If the project or your subcontract requires you to furnish a performance bond, you're guaranteeing that you'll complete your scope according to the contract terms. If you default, the surety either completes the work, hires a replacement, or pays damages.

The cost of a performance bond (typically 1–3% of the contract value) needs to be included in your bid. More importantly, your bonding capacity — the total amount of bonded work you can carry at any given time — is a critical business metric.

Sureties evaluate your capacity based on working capital, net worth, cash flow, work-in-progress, and track record. A $2 million subcontractor with strong financials might carry $5–8 million in bonding capacity. A $2 million subcontractor with thin margins and slow receivables might only qualify for $3 million.

The Bottom Line

Payment bonds and performance bonds serve fundamentally different purposes, and understanding both is critical for subcontractors on public works. The payment bond is your safety net. On Caltrans projects, Section 3-1.07 requires the prime contractor to furnish both a performance bond and a payment bond at 100% of the contract amount, with bond forms complying with Civil Code §995.660(a). On local agency projects, the Greenbook Section 2-4 sets the same 100% requirement.

If you are not getting paid on a public works project, the payment bond is your primary remedy. Know the bond surety, know the claim deadlines, and do not let them pass. The performance bond protects the owner, not you, but it indirectly affects you because a defaulting GC triggers surety involvement that can disrupt the entire project. Understand both instruments before you sign the subcontract.