On public projects, payment rights are protected by bonds, rather than by liens against a property.
Since foreclosure cannot be forced on public property, security on such projects must be provided by a payment bond. Just like mechanics liens, the requirements for filing and serving payment bond claims can vary from state to state. But, what happens after the claim has been filed, since foreclosure is not an option?
Unfortunately, after making a payment bond claim, it’s not unusual for things to get very quiet. This makes it hard to determine what next steps should be taken, when the claim may be paid, or if there is anything to do that will move the claim along.
Send a Copy of the Claim to Everyone – Especially the Surety
The requirements for which parties need to receive the bond claim vary from state to state, and according to what type of project gave rise to the claim. Generally, most states require giving a copy of the bond claim to some combination of the general contractor, the public entity contracting for the work, or the surety. In many circumstances, however, the surety is not specifically required to receive a copy of the bond claim.
While the claimant must comply with the requirements of the specific state in which the project is located, and any requirements specific to the project type, don’t stop there. In order to get a response on the claim, make sure everybody with an interest has received it. This means sending the claim to the public entity contracting for the work, the general contractor, the hiring contractor (if different), and especially, the surety. The surety is the party who can exert the most pressure to get payment, so it is important to be able to identify the surety and send it a copy of the claim.
Since most states only require the bond claim to be provided to the general contractor and the public entity, why would sending the claim to the surety make a big difference in shortening the time to expect payment? It has to do with how surety bonds work. To qualify for a payment bond, a contractor must apply with the surety, and then to get the payment bond, the contractor must sign certain agreements with the surety.
Throughout the application process, the surety will examine the creditworthiness and solvency of the contractor applying for the bond. A contractor will not be bonded for $5 million if it has $20,000 in assets. While surety companies issuing a bond will take some risk, it is not going to take much. Just like credit card companies review prospective cardholders before issuing credit, a surety company must also do some due diligence on the company it is agreeing to protect.
Once approved, the surety company will require the contractor to sign contracts to acquire the bond. These generally include agreements that the contractor will indemnify the surety from any and all claims. To ensure the contractor will do this, the surety also requires the contractor to pledge assets to it in the event of a default. The contractor may pledge rights to cash, stocks, or properties. In the event of a default, the surety can seize these assets without much judicial work, and use those assets to pay any claims.
Given the above, that contractors have pledged so much to the surety, and are generally required to enter into such onerous contracts with surety companies, that contractors do not like when their surety discovers a claim. As soon as a claim is discovered, the surety will send a formal demand to the contractor requiring the contractor indemnify the surety and resolve the claim. So, in practice, when contractors receive claims, they frequently procrastinate sending them to the bonding company, or they may never send the claim along in an attempt to bury their head in the sand and forget about their problems.
This means that it’s a good idea to send the claim directly to the surety in case the contractor does not. Sending the claim to the surety directly turns up the pressure immediately, and is a good way to ensure that the claim is correctly and timely lodged.
Wait for Surety’s Response–Then Promptly Reply
After the bond claim has been sent to all the appropriate parties, there is not much to do other than to wait for a response. The bonding company will formally open the claim, after receipt, and send a responsive letter requesting backup information. While waiting for a response, gather all documents or other information supporting the claim and have it ready to provide the surety when the response comes. It typically takes two to four weeks from the date the claim is sent to hear anything back. The more organized the supporting information, the quicker the surety can reply, and the faster payment will be made.
Follow Up With the Surety
When the response is received from the surety, take note of the specific representative who has been assigned to the claim. When sending the response of supporting documentation, contact the representative to make sure it was received, and then set a schedule to check in with the representative every week or so.
The time in which a surety must process a claim varies, but can be as long as 60 days or more. Since this time period may allow for the claim to get stale, or slip from the top of the representative’s mind, the contact makes a difference. Not only will routine contact keep the claim on the representative’s mind, the claimant will also be able to quickly resolve any issues that may delay getting paid.
Collections or Lawsuit?
If the above steps do not work to receive payment in a timely fashion, escalate the situation by referring the claim to a collections partner, or by filing a lawsuit. Many people and companies have a negative view of collection agencies, but with the right partner, an outside collections company can be very useful in securing payment.
If collections is not an option, or if the collections team has been unsuccessful in getting payment, consider filing a lawsuit. Lawsuits are time consuming, and expensive, so they should only be used as a last resort, but there comes a point where it is the only remaining option. And, just like with mechanics liens, bond claims have an expiration date. If payment has not been received as the deadline to enforce approaches, file suit in order to preserve the bond claim and get paid.