A payment bond is a type of surety bond that guarantees that a contractors material suppliers and subcontractors are paid according to the terms laid out in their contracts. Payment bonds are often required on public construction projects where mechanics liens are not allowed. They are purchased by contractors from a surety, who they pay a premium to, and are normally issued simultaneously with a performance bond. Payment bonds are required in contracts over $35,000 with the Federal Government and must be 100% of the contract value. Payment bonds are often grouped together with bid bonds and performance bonds, which protect the obligee in case a contractor pulls out of an awarded contract or if the work falls short of what the contract calls for, respectively.

The primary reason for requiring payment bonds is to ensure that subcontractors and suppliers are paid according to the terms laid out in their contracts, even if problems arise, and to prevent financial loss for other parties involved in the process. Payment bonds make it more appealing for subcontractors and suppliers to work with contractors, knowing that they will not potentially suffer financial loss. Payment bonds are often written for the expected costs of subcontractors, suppliers, and laborers, and the surety agrees to pay out all valid claims up to the amount the surety bond is written for, but not to exceed that amount.