This means that the surety can recover any expenditure from the contractor s assets. If a contractor is failing to perform adequately because of cash flow or other financial problems, a surety may extend short-term help to the contractor. This avoids the additional costs that would be incurred if a new contractor had to be brought in to complete the project. A payment bond gives protection to the owner if the subcontractors and suppliers are not paid by the prime contractor. The subcontractors are paid by the surety if the contractor fails to pay them.
Payment bonds prevent liens.
Subcontractors and suppliers can file liens in most instances of nonpayment. Liens are permitted since the benefit is conferred to the owner by the inclusion of labor and materials in the project. To control their risk exposure, sureties limit the maximum amount of uncompleted work that a contractor can undertake at one time. This is known as the contractor s bonding capacity. This multiple is smaller for some types of projects such as heavy construction that involve few subcontracts, large amounts of expensive equipment, and work in isolated sites.