General contractor default can be an unpleasant surprise for many subcontractors. Even when subcontractors diligently check on and evaluate the contractor before beginning work on a project, there’s always a small chance that a contractor can default.
Fortunately, payment bonds protect subcontractors. If the general contractor has obtained a valid payment bond at the beginning of the project, subcontractors can benefit from the protection the bond offers.
Subcontractors considering filing a claim against a general contractor’s payment bond need to know the most pertinent facts about how these bonds protect them and what they should do to protect themselves.
What is a Payment Bond?
Depending on the nature of a construction project, payment bonds may or may not be required by law. On federal construction projects exceeding $150,000 and on most state and local projects, general contractors are required to post both payment bonds and performance bonds, which protect the owner (the oblige) of the project. For many private, commercial or residential projects, bonds may be posted, depending on the project and the owner’s decision.
Payment bonds, unlike performance bonds, do not protect the owner directly. Rather, they are a protection for subcontractors, material suppliers and laborers that they will receive payment for their work by the general contractor in due time. If they don’t get paid, they can file a claim against the bond, and receive fair compensation from the surety that has underwritten the bond.
Under the Miller Act, this guarantee also applies to second-tier subcontractors, suppliers and laborers who are contracted by a first-tier subcontractor. This, however, is valid only for federal construction projects. Second- and third-tier parties may have recourse under a payment bond on other projects if this is explicitly stated in the bond.
But what if the general contractor hasn’t paid? What are the requirements for filing a payment bond claim?
Payment Bond Claim Requirements
Ideally, subcontractors will never have to file a claim against the general contractor’s payment bond. Usually sureties will try to come to a settlement to avoid a claim. Unless a general contractor is truly unable to pay or does not want to, another solution can usually be found that everyone can agree to. Remember, the surety is interested in finding a solution that is fair to all parties involved.
Obtain a Copy of the Bond and Read it Carefully
In the case of a legitimate cause for a claim, subcontractors need to know how to file a claim.
Before even beginning the project, subcontractors should obtain a copy of the payment bond from the project owner and familiarize themselves with its language and stipulations. These provide some guidelines and conditions about how to file a claim against the bond, especially if it is a private project.
But not all answers can be found in the bond’s contractual terms. It is a common misconception that a bond sets out all conditions and terms for filing a claim against it. Usually state statutes override at least some of these conditions.
Learn About State Statutes and Regulations
Subcontractors would do best to study state statutes along with the payment bond and consult with an attorney if they have further questions.
State statutes include specific information about whether, how and within what deadline subcontractors must send a preliminary notice of a claim when working on a public construction project. Failing to give notice can often result in not being allowed to raise a claim afterward if this is part of a state’s statute. Most private construction projects also have requirements about giving preliminary notice of a claim.
For example, this detailed guideline on filing a payment bond claim in Texas, provided by the Contract Management Department of the city of Austin. As a subcontractor or supplier, be familiar with those details in order to secure the protection which a payment bond offers.
And for claims on a federal project, under the Miller Act, the rule is that notice must be sent within 90 days of the last date on which a second-tier subcontractor or supplier has worked on the project or, respectively, delivered materials. First-tier claimants on a federal project are not required to give notice.
Better Safe Than Sorry
With all of the above in mind, it’s always a good idea for subcontractors to carefully study all the relevant documentation, consult with experts and even speak to the surety if there are any doubts. Payment bonds provide the safest form of protection for subcontractors under public and private construction projects. However, subcontractors must be familiar with their rights and responsibilities in order to protect themselves.