A payment bond is a deposit that the winning bidder on a construction contract is required to post. This bond is required by the party issuing the contract, so it can be assured that contractors and suppliers do not impose liens on the construction completed under the contract.
This deposit is surety that the bidder will pay its suppliers, subcontractors, and other third parties the amounts owed to them in relation to the contract. If not, the bond is used to pay these third parties. The payment bond is returned to the bidder at some point following the successful conclusion of a contract, following a period when these third parties must make notification of any instances of non-payment.
The size of a payment bond, which is typically in the vicinity of 20% of the total amount of the awarded contract, can represent a significant monetary hurdle for smaller contractors who do not have the assets to post the bond or attract the financing for it. The not uncommon result is that the mere presence of a payment bond requirement will keep smaller entities from bidding on a contract.
A payment bond may be required in conjunction with a performance bond, and so may be combined into a payment and performance bond.
A payment bond is also known as a contract payment bond.