Companies may sometimes file a mechanics lien claim if they are unpaid for furnishing labor or materials to a construction project. Though the remedy is strong and effective, it is not always available.
For example, lien claims can be asserted against a private home, but they may not be asserted against the U.S. president’s private home (the White House). This is because state and federal properties are insulated from lien filings. The substitute remedy is a bond claim, and there are misconceptions and misunderstandings about how these claims work and what must be done to preserve bond claim rights.
When Are Payment Bond Claims Available?
Contractors may be confused about what payment bond claims are and when they are available. Payment bonds are a type of insurance policy written to guarantee that a certain party will make all payments required of them.
For example, a surety may issue a payment bond on behalf of a general contractor to guarantee that the general contractor will pay all subcontractors and suppliers. To the extent that a company doesn’t get paid, it could file a claim directly with the surety against the issued payment bond. That is a payment bond claim.
Payment bonds may be associated with privately owned projects, and frequently are associated with very large private project. More commonly, however, they are associated with state and federal projects. In fact, on most state and federal projects, they are required. On state and federal improvement projects, those unpaid for work or materials are prohibited from filing a traditional mechanics lien and are only able to file against the payment bond.
Misconception 1: Bond Claims Need To Be ‘Filed’
There is a lot of confusion regarding the term “filed.” Contractors may say that they need to “file a bond claim,” similar to how they will “file a lien.”
Mechanics lien claims are filed with a county recording office and lawsuits are filed in a county courthouse, but bond claims usually are not technically filed anywhere. They are simply mailed to certain parties. The trick here is to make sure that the right information (i.e., the claim itself) is mailed to the right parties in the right way.
Misconception 2: ‘Filing’ A Bond Claim Requires Compliance With the Bond Terms
Companies need to answer a lot of questions to properly file a bond claim, such as:
- When is the deadline to file the claim?
- Who must receive the bond claim?
- In what format must the bond claim be?
- Must notices be sent to preserve the bond claim right?
It is a common misconception to believe that the answer to all of these questions resides within the bond’s contractual terms. While the bond’s terms can be important, state or federal law that applies to the project almost always overrules them.
The law almost always requires projects to have a payment bond. Usually the law mandates that a payment bond be associated with a project as opposed to the parties voluntarily incurring that expense. In such cases, the law requiring the bond sets forth the procedures and requirements to place claims against the bond, and the terms of the bonding contract are much less consequential. In fact, many times they are irrelevant.
Misconception 3: Preliminary Notices Are Not Needed to ‘File’ A Bond Claim
Many companies think preliminary notices relate only to commercial and residential projects. However, a lot of states require preliminary notices on state projects. If a preliminary notice is required but not sent, the ability to later make a payment bond claim will be forfeited.
Preliminary notices must be sent at the very beginning of a project. While the act of preparing a preliminary notice is quite simple, the challenge is segregating a portfolio of projects between those that will require the notice and those that will not, and then making certain the right notice goes to the right people.