For contractors working on a state or local public construction project, the state law will likely require a payment bond. When a subcontractor or material supplier is faced with nonpayment, making a payment bond claim is the best way to ensure you get paid what you’ve earned. However, there are a lot of construction companies that don’t fully understand their bond claim rights, or the process of making a claim. In this article, we’ll look at a few common myths about payment bond claims – and debunk them.
Myth 1: Preliminary notice isn’t required before a bond claim
When some people think about preliminary notice, they immediately think about protecting their right to file a mechanics lien. But many contractors fail to realize that many states require preliminary notices on public projects, too.
However, in other states, notice timing and requirements are completely different on private and public projects. For example, see New Jersey’s preliminary notice requirements or laws governing notice in Nevada.
You’ll need to be sure that you are familiar with all of the notice requirements before starting a project. Many of the deadlines offer a very short period of time to send written notice. If you either miss the deadline or fail to send the written notice to all the required parties, it can kill a contractor’s ability to make a bond claim down the line.
Whether you’re working on a government job or on private construction (which may also come with a payment bond), it’s a good idea to send preliminary notice on every project.
Myth 2: Payment bond claims need to be filed
This may just be a misuse of terminology. Mechanics lien claims are filed, while bond claims aren’t. Because mechanics liens attach to the actual property being improved, they are filed in the county recorder’s office, registry of deeds, prothonotary office, or whatever the office is called in your state.
Bond claims don’t work that way, because they don’t affect the property records. These types of claims are made directly against the payment bond. Therefore, there’s no reason to have to “file” the claim anywhere. The claim is typically sent to either the contracting public entity, general contractor, and/or the bond surety company.
Quick side note: Even if the surety isn’t a required party to receive a bond claim, it’s always recommended that you send a copy of the bond claim to the surety anyway. This can help get their attention quickly and expedite the claim process.
Myth 3: There’s no difference between bond claims and mechanics lien claims
Mechanics lien claims and bond claims are both tools that construction businesses can use if they aren’t paid. But they apply in different scenarios and offer different remedies. The rights and recovery processes are different.
If a contractor or supplier isn’t paid on a private project (without a payment bond), they may file a mechanics lien in the clerk or recorder’s office. This grants the claimant a security interest in the property itself. If filing a lien doesn’t spur payment, they must initiate a foreclosure lawsuit in order to collect. Foreclosure forces the sale of the property, and a portion of the proceeds (depending on how many creditors have an interest in the property) will be paid to cover the debt.
For public projects, a mechanics lien isn’t a viable remedy. Why? Because private citizens aren’t allowed to have a security interest in public property. This is why state Little Miller Acts require the GC to take out a payment bond on public works projects. The remedy provided is a right to the money secured under the bond. The claim is made against the surety itself, and will typically entail an investigation into the claim.
- For a full breakdown: What’s the Difference Between a Mechanics Lien and a Bond Claim?
Myth 4: All construction bonds are created equal
There are many different types of construction bonds that can be associated with a project. A payment bond acts similar to an insurance policy. It’s a type of surety bond that is typically posted by the prime contractor on a construction project to help guarantee payment to all the subcontractors and suppliers below them on the project. But what about the other types of bonds?
There are three other common types of bonds that may come into play on a public project.
- Performance bonds are taken out for the benefit of the property owner (public entity). These ensure that the general contractor fulfills all of their obligations under their contract. If they fail to do so, the performance bond will ensure there’s money and leadership available to keep the project going.
- Bid bonds are typically required during the bidding process for the project itself. These ensure that the contractor is financially stable and proves they have the necessary capital to take on the project.
- License bonds are typically required in most states to get your contractor’s license. This is another form of surety bond. However, this bond is taken out to ensure that the contractor complies with state or federal laws and regulations; and certain violations will be covered by the bond.
Myth 5: The payment bond has all of the info you need
In some cases, the information on a payment bond won’t apply. Now, don’t misunderstand me. Getting a copy of the payment bond is not only your right, but it is also incredibly important when working on a public works project. It provides vital information such as the bonding company information, the GC’s information, and any additional notice or other procedural requirements.
However, as useful as this information is, it may be irrelevant in some cases. If working on a project that falls under the federal Miller Act or state Little Miller Act provisions, those laws will govern the bond claim process and requirements. They take precedence over what the bond agreement states. This includes requirements like sending preliminary notice (see Myth 1 above), who you need to send the bond claim to, and deadlines to make or enforce a claim.
Myth 6: Sureties pay for all payment bond claims
Sure, when a claim is made against the bond, it’s the surety that makes the initial payment. But that doesn’t mean the contractor is off the hook. Anytime a contractor takes out a bond with a surety company, an agreement is signed. And just about every bond agreement will include an indemnification clause.
An indemnification clause will read something like [the party] agrees to indemnify, protect, and hold harmless the surety company. These basically require that one party assumes the responsibility for any third-party claims made against them. Therefore, the contractor is the one that is ultimately responsible for paying off the claim. Once the surety has paid, they will seek reimbursement from them.
Demystifying the bond claim process
Most construction businesses aren’t making a claim against a payment bond every day. So it’s understandable that many contractors and suppliers are uncertain about the process. However, once you understand how payment bonds work, and the way that claims get settled, it’s pretty straightforward.
If you have a question about getting paid from a payment bond, ask a lawyer in our Expert Center. We’re here to ensure you don’t fall victim to any bond claim myths. Whether you are working on a Miller Act project, or for a GC with a payment bond on a residential project, you have the right to make a claim against the bond if you don’t get paid.