Payment bonds, backed by a surety, are required for most public (state/federal) projects, and may be provided for certain private projects.
In these circumstances, the bond provides the security that otherwise would be provided by the property itself and realized through a mechanics lien. Because a mechanics lien cannot be placed on a public property, a claim for payment can be made against the bond instead. On private projects with a bond, the owner, developer or some other interested party has provided or required the provision of a bond in order to keep the property free of lien claims, and the project moving along smoothly.
In most cases of payment bonds, whether the project is public or private, the general contractor is required to acquire a payment bond to insulate the owner against non-payment claims from parties down the contracting chain. It’s less likely, but not impossible, that payment bonds are acquired further down the chain as well (e.g., by subcontractors to insulate a general contractor from the same risk).
In the event of a payment dispute, a claim may be made against the bond rather than against the property itself. For many reasons, this can be smoother and easier than filing a mechanics lien claim against a property because the lengthy and expensive foreclosure process is avoided. In other ways, a bond claim can be tedious for every party involved.
Making a Bond Claim: Follow the Correct Procedures
For the bond claimant, many of the same trip-wires exist for making a claim against a bond as for filing a mechanics lien. While the bond is provided for the specific purpose of protecting the claimant from non-payment, certain specific steps and procedures are required. Just like a mechanics lien claim, there can be strict timing and noticing requirements for making a successful bond claim.
Following the correct procedures for filing a bond claim can be confusing, especially because rules and requirements might conflict. Unlike mechanics lien claimants, bond claimants are presented with state or federal statutory rules and requirements as well as rules and requirements specific to the bond provided. Navigating these terms can be difficult because sometimes the direction from the bond conflicts with statutory requirements.
Typically, this confusion can be alleviated by following the general rule that state and federal statutes must be followed if filing a claim on a state or federal construction project, and the claimant must usually follow only the payment bond terms if filing a claim on a private project. While sureties on public projects have a significant interest in being provided notice and setting forth the timing of bond claims, the rules that must be complied with are the rules set forth by state or federal statute.
Follow Up to Get Paid
In order to make a successful bond claim and get paid, it is essential to file the claim correctly, within the appropriate time frame, and after providing the required notices. However, completing these steps correctly is not always enough. The success of a bond claim, and the speed at which the claim moves along, can be directly attributed to follow-up.
Most sureties will receive the claim and start a very bureaucratic and lengthy process of evaluation. This usually includes giving the bonded party (generally the general contractor) a relatively long time to respond, and requesting additional supporting information from the claimant. This means that the claim probably won’t get paid quickly (or even at all) unless the claimant continually follows up and provides all requested supporting or supplemental information in a timely fashion.
When the General Contractor Obtains or Provides the Bond
Usually, the party obtaining a payment bond is doing so at the behest and insistence of the party who hired them, or to comply with state or federal law requirements. As long as there are no payment disputes on the project, the bond just sits there; but as soon as a payment dispute arises, a claim against the bond can be filed which throws a wrench into the project works.
The first thing to do after receiving a bond claim is to notify the surety. Sometimes general contractors (or whichever party obtained the bond) might want to hide the bond because they want to avoid documenting a problem they think might go away. This is a terrible idea. Some states and bond terms even require the claimant to notify the surety when a bond claim is filed.
Even in situations where this notification is not explicitly required, informing the surety of the bond claim is crucial. If the general contractor (or other bonded party) is aware of the bond claim but the surety is not, the surety could use this as a defense for not paying the claim and the general contractor (or other bonded party) may be held responsible. If the surety can avoid payment, those costs and even associated legal fees can fall to the bonded party. That being said, it’s easy to make sure this doesn’t happen. Provide the surety with prompt notice whenever a claim is made, even if it hurts organizational pride to do so.
In addition to providing prompt notice to the surety, the bonded party must evaluate and defend the claim if it is disputed. Just as the claimant needs to follow up with the surety, the bonded party needs to make sure communication with the surety is clear, structured and supported. The surety likely has an inclination to accept the bonded parties’ arguments, but if those arguments are not organized and well-supported with appropriate documentation, that inclination will not last long. If such supporting documentation is not provided to the surety, the surety may be forced to pay a claim whether or not the bonded party believes it to be valid or appropriate. This can mean that even if the bonded party has a reasonable and legitimate dispute with the claimant, they still may be on the hook to reimburse the surety for the claim.
However, note that it pays to be fair. If the claim is undisputed and legitimate, it should be paid. Not only can this salvage some good will with the claimant, it can also create a stronger relationship with the surety.