The instruments available to secure money unpaid on construction projects are generally neatly broken down into two types: mechanics liens for private projects, and bond claims for public projects. This is true because public property cannot be foreclosed on, so a different security mechanism than a mechanics lien was required to ensure the payment of project participants, and a pile of available money set aside for just the purpose seems to work nicely.
While this is a clean delineation, it’s an oversimplification and, like many things in construction payment, the truth is more complicated.
(And regarding payments in the construction industry, the truth is out there! An excellent “source for truth” for all things construction payments-related is the encyclopedic resources section of the Levelset website. If you have any questions at all on the subject, chances are you can find the answer there!)
Lien Rights = Private
Bond Claim = Public
The “lien rights = private construction project | bond claim = public construction project” demarcation is generally accurate, but there are certain circumstances in which the payment security world gets turned on its head.
In some states, parties on public improvements have a lien right as well as a right to make a claim against the project’s bond. This “lien on funds” isn’t against the property itself, but rather works like a stop notice as a right against the money unpaid to the GC.
Likewise, there are certain instances in which the remedy on a private project is against a bond, rather than a mechanics lien on the property.
Bonded from the Start?
While rare for the most part, private projects can be bonded from the jump. Large enough or sufficiently sophisticated parties may require bonds on the project to keep the property clear of liens. Generally, only the largest private companies or property developers are going to require construction jobs to be fully bonded – but if they are, any potential lien claimant will be forced to attempt to recover against the bond, rather than against the property itself.
There are many reasons why this may be desired, but the main practical reason for obtaining a payment bond on a private project to avoid liens is so that the property may be sold, refinanced, or mortgaged without the worry of a mechanics lien (especially from a hidden party) gumming up the works.
It’s also worth noting that large GCs may require their subcontractors to provide payment bonds when they sign their contracts. Just as property owners don’t want to deal with mechanics liens on their property, large GCs don’t want to shoulder the financial and contractual risk associated with mechanics liens coming from parties beneath the main subcontractors, and the GCs can have the leveraging power to make sure they don’t need to.
Despite the reasons that payment bonds on private projects can be valuable, they are relatively uncommon, and mechanics liens remain the standard for securing payment on private construction projects.
However, just because a mechanics lien was successfully filed, it doesn’t mean that a bond may not still arise to take the property’s place. Since mechanics liens are frustrating and expensive for the property owner or general contractor by causing the project to grind to a halt or halting a sale or refinance, these parties may look for a way out. This means that there needs to be a way to balance the claimant’s right to security to ensure payment, and the owner’s desire to be in control over his own property.
This balancing act is accomplished by allowing a lien to be “bonded off.” When applicable, a qualified bond (of an amount generally set by statute) may be substituted for the property. That way, the claimant still has security from which to recover payment (the ability to recover from the pile of money represented by the bond), but the lien is no longer tying up the property. In a sense, the bond steps into the shoes of the property.
Whether the project is bonded from the start or a bond arises later, the same hint applies for the potential claimant: you don’t need to worry about it. A bond provides security, too, and a bond for a specific purpose can be less time consuming to recover from than going through a foreclosure proceeding against the property. So, whether the security available on your project is the “regular” security, or it’s a project where the general scheme has been turned upside down with a bond – you’re still protected.