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Bonding companies do not like mechanics liens. As a matter of fact, most bonding companies will have contractors answer directly to them once a lien is filed. It gives them unwanted exposure, so these bonding companies will immediately put pressure on the contractor to get the issue resolved and get you paid. This is part of a 17-Part Series on How Mechanic Liens Work To Get You Paid.
What’s a Bond – And Why Have One?
Posting a bond on a construction project is a prudent way to protect the job and try and keep the operations moving as efficiently as possible. A bond allows parties involved with the project to make claims against the bond rather than the property. That way, parties can still take security in something when they go unpaid and the property remains untouched (for the most part) from liens. Also, bonds help keep the work project going because when their are no liens filed against the property, foreclosure is not a risk. The property is not at risk of being sold out from under the owner and general contractor. For these reasons, some property owners require GCs to post a bond on the project to insulate from the risk of liens. On a bonded project, a mechanics lien will eventually work to make a claim against the bond (a pile of money) rather than the property itself.
Happy Bond Company = Happy Contractor
Bond companies, like insurance companies, have a huge pile of money that could be used if needed, but really don’t want to ever need to use it. In an ideal world, they would like to post a bond on a project and then fade into the background for the rest of the construction project. If the ideal was reality though, what would be the point of bonding companies? That being said, bonding companies still enjoy a limited level of exposure – their contract with the GC will be sure to make sure that the Surety will be indemnified by the GC for claims made. This is one big reason the GC will make it a point to make sure their bonding company is happy. Another is that the GC will need to qualify for and obtain bonds for future projects, as well.
Mechanics Liens Take Out the Happiness
When a mechanics lien arises, bonding companies will pressure contractor’s to resolve the issue immediately. When you file a mechanics lien, you bring the surety into the limelight. After all, they’re the ones with the money securing the claim. Because of this, mechanics liens create unwanted exposure for bonding companies, which in turn creates some serious pressure on contractors to resolve the issue.
In many situations, even the threat of a mechanics lien will pressure a contractor into paying in order to keep the claim fromm getting to the Surety, and being associated with the particular GC in the bonding company’s eyes. The more mechanics liens any particular GC has on their record, the less likely a bonding company is going to be willing to business with them. Therefore, if you file a mechanics lien, you are directly affecting the contractor’s ability to bond. This, as well, is analogous to an insurance company. After a certain amount of claims, the insurance company will no longer want to cover you because you are no longer profitable for them. You are costing them money. The same goes for bonding companies. If a contractor is irresponsible in paying their subcontractors and suppliers, bonding companies are not going to want to work with them. This is a serious concern for contractors because an inability to provide a bond can severely limit the available projects on which the GC can bid.
Other Ways A Mechanics Lien Works To Get You Paid
Mechanics lien claims can affect a contractor’s bonding ability, and work to get claimants paid. However, there are many other reasons mechanics liens work. We’ve put together a Free Guide to the 17 Ways A Mechanics Lien Works To Get You Paid describing some of those reasons, and those 17 reasons are listed below.
- A mechanics lien encumbers the property
- A mechanics lien gets the lenders attention
- A mechanics lien gets the owners attention
- When mechanics liens are filed they cause contracts to get breached
- More parties become obligated to your debt
- A mechanics lien sets a firm deadline
- You can always fall back on the property for payment if you filed a mechanics lien
- People will pay you to avoid dealing with the mechanics lien
- Mechanics liens are hard to challenge
- Mechanics lien claims help when parties file for bankruptcy protection
- Mechanics lien will effectively freeze money flow on a project
- Mechanics lien claims may force parties into favorable joint check agreements
- Lien claims may entitle you to attorney fees and other costs
- Mechanic liens escalate the situation and prioritize your debt
- Mechanics lien claims may affect a contractor’s bonding ability
- Lien claims affect relationships
- Mechanics liens creative leverage