In today’s market, getting paid in full and on time is the exception, not the rule, causing significant cash flow challenges for construction contractors. In fact, surveys show that fewer than 10–12% of contractors always get paid on time according to the terms in their contracts, while more than 80% regularly face slow payments. (The average payment time is 74 days.) That unfortunate reality is why two tools, payment bonds and mechanics liens, are critical for subcontractors, suppliers, and the general contractors who manage them.
Surety Bond Professionals is a family-owned and operated bonding agency with over 75 years of experience. With access to a broad range of surety markets, our expert agents are ready to assist with all of your construction bond needs.
What are payment bonds?
A payment bond is a surety bond issued on behalf of the prime contractor to guarantee payment of subcontractors, laborers, and suppliers for their work and materials, even if the contractor runs out of cash or goes bankrupt. On publicly funded projects, federal Miller Act and state “Little Miller Act” laws generally require payment bonds above certain contract values because mechanics liens cannot be filed against public property. On private projects, owners may also require bonds to avoid liens and keep the title clean.
How does a payment bond work?
Here’s how it works. The party that has not been paid, gives notice and files a bond claim within statutory or contractual deadlines. The surety then investigates the claim. If valid, the surety pays the claimant (up to the bond’s penal sum), then pursues reimbursement from the contractor.
What are mechanics liens?
A mechanics lien (or construction lien) is a statutory claim recorded against the property for unpaid labor or materials. It effectively treats the property as collateral for the money owed to the claimant. If the debt still isn’t resolved, the claimant can ultimately foreclose the lien, forcing a sale or settlement so the debt can be paid from the property’s value.
Mechanics liens are available only where state law allows (generally not for public property). Strict notice and filing deadlines apply. Claimants can lose their rights by missing a pre-lien or recording deadline. And owners will have trouble refinancing or selling the property until the dispute is settled and the title is cleared.
What are the benefits/drawbacks of payment bonds for subcontractors and suppliers?
Payment bonds give claimants a higher chance of ultimate recovery because they bring in a third-party surety with financial strength. The claim is not limited by the project owner’s equity in the property or the contractor’s checking account—only by the bond amount. Even if a contractor files for bankruptcy, the surety usually remains liable. Additionally, a payment bond means less hostility with the project owner, as claimants pursue the contractor and surety for payment. That can preserve relationships, especially if the owner is not the source of the problem.
The downside of payment bonds is that claims can involve detailed documentation, strict notice rules, and a lengthy investigation. Sureties don’t write checks without digging into claims. And because there is a cap on a payment bond’s penal sum, and multiple subcontractors and/or suppliers may file claims against the same bond, recovery may be prorated if claims exceed the bond amount.
What are the Benefits/drawbacks of mechanics liens for subcontractors and suppliers?
A properly filed lien clouds the property’s title and can block refinancing, sales, or new financing, giving owners a strong incentive to resolve payment disputes quickly. And compared with full-blown litigation, recording a lien and sending required notices can be a relatively inexpensive way to secure a claim for nonpayment. On many private jobs, lien rights are the main statutory protection.
Mechanics liens also have drawbacks. Every state has different rules: who can lien, what must be in the notice, when it must be sent, and how long claimants have to foreclose. Recovery limited by property value and the priority of a claim. If the project is underwater or heavily mortgaged, there may not be enough equity to pay everyone. Finally, owners and general contractors typically view a mechanics lien as a “nuclear option” because it can damage long-term relationships, even when a claim is justified.
How do payment bonds affect general contractors?
When subcontractors are protected by a payment bond, they’re less likely to walk off the job or file mechanics liens against the project owner. This keeps owners happier and projects moving along.
On the minus side, premium cost and bonding capacity can be issues for GCs. Both can be negatively affected when there are too many claims. Sureties underwrite payment bonds based on a contractor’s financials, work-in-progress, and history. In the current market, it is important to monitor how rising insurance costs affect construction bonding limits, as these expenses can tighten the working capital sureties look for when approving your program.
How do mechanics liens affect GCs?
When subs lien projects, owners often turn to the GC with a demand to “fix this.” Even if the nonpayment originates with the owner, the GC’s relationships and reputation are on the line. In some cases, the threat that your subs will lien, despite your efforts, can strengthen your hand in payment disputes with owners. Managing lien waivers, tracking preliminary notices, and dealing with lenders all take time and overhead, creating an administrative burden.
In the end, payment bonds and mechanics liens are complementary tools. Bonds shift risk to a surety and keep owners’ titles clean; liens put direct pressure on the property itself. Smart contractors design their credit policies, contracts, and project controls around both.
Given that the overwhelming majority of subcontractors and suppliers do not get paid on time, relying on “good intentions” is not a strategy. Understanding how to use payment bonds and mechanics liens is one of the most important risk-management moves a contractor can make on any project.
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Frequently Asked Questions
What’s the main difference between a payment bond and a mechanics lien?
A payment bond is a three-party guarantee (owner, contractor, surety) that subs and suppliers will be paid on a specific project. If they aren’t, they can make a claim against the bond. A mechanics lien is a legal claim filed against the property itself for unpaid labor or materials. If not resolved, it can be enforced through foreclosure.
Are payment bond claims and mechanics liens subject to deadlines?
Yes—both are deadline-driven. For payment bond claims, you usually must give written notice within a set number of days after last furnishing labor or materials, and file suit within a statutory time frame. For mechanics liens, most states require a preliminary notice and then recording the lien and enforcing (foreclosing) it within strict time limits.
Always check the specific statute for the project’s state and type (public vs. private).
Do payment bonds and mechanics liens cover the same types of claims?
They largely cover unpaid labor, materials, and certain equipment or services furnished to the project. But there are differences:
- Some states limit lien rights for suppliers to suppliers (second-tier) or for off-site fabrication.
- Bond forms may exclude certain items (e.g., markups, delay damages, or unapproved change orders).
Read the bond form, your subcontract, and the state lien statute to see what’s actually covered.
