The bond allows a direct claim against the surety for work performed on the bonded contract. The surety is responsible to evaluate the claim independently and pay if warranted. This allows subcontractors and suppliers to bid for work with contractors with whom they do not have a personal history, relying on the surety's guarantee of payment. It also allows these subcontractors and suppliers to submit a bid that does not include a contingency for nonpayment, reducing the bid price. This difference in bid price might be the factor that makes the subcontractor or supplier the bidder of choice to the contractor.
Payment bonds can keep a subcontractor or supplier in business rather than facing bankruptcy.
Small and emerging subcontractors particularly benefit from the protection of the payment bond as they are more likely to be adversely affected by nonpayment on one project. It is important to understand, however, that a surety bond is not like an automobile or homeowner's insurance policy. The bond is a three-party agreement, and the surety has contractual duties to both the obligee and the principal. Some owners believe a surety automatically will take the side of a contractor. This simply is not the case.