As you know, payment bonds assure subcontractors and suppliers that payment will be made for the labor and materials they provide to a project. This protection especially is important on public projects where payment bonds serve as substitutes for the lien rights a subcontractor or supplier would otherwise have if the project was not being performed for a public owner.
However, you may not be aware of the legal relationships created through a payment bond, the various types of payment bonds, the scope of protection provided under a payment bond or the process you will be required to follow to recover under a payment bond.
Terminology and obligations
It is important to realize payment bonds are not insurance policies. They are contracts that essentially obligate the surety and principal to pay for labor performed on and materials provided to a construction project. The contractor who executes the bond will be the principal on the bond. The party to whom the principal is bound under its contract will be the obligee. When a prime contractor provides a payment bond, the obligee will be the project owner. When a subcontractor provides a payment bond, the obligee is likely to be the general contractor. Those supplying labor or materials to the project often are referred to as claimants or beneficiaries.