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Construction industry participants routinely deal with slow payment or even non-payment. There are many reasons why the construction industry has such pervasive payment issues and business failure rates), but the practical aspect of money moving through several different parties (at Levelset, we call this the “payment chain”) to get to the party to whom it’s ultimately owed, coupled with the necessity of floating project costs, can easily lead to payment frustrations.
To protect against nonpayment, construction participants have two unique protections built into state laws. Since the protection, and the way to get it, is different depending on whether the claimant must file a mechanics lien or a claim against the project’s payment bond – it’s helpful to know the differences between the two remedies.
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Difference by project type
The general rule is pretty straightforward. The mechanics lien remedy (also known as a construction lien) is available on private projects, and the bond claim remedy is available for public works projects. Each of these remedies provide the claimant with a security interest in a piece of collateral to ensure payment. Whether the interest is in the improved real property itself, or a “pile of money” set aside to protect against nonpayment depends on the nature of the project, but the result is intended to be the same: construction participants getting paid what they have earned.
Private Projects = Mechanics Liens
Filing a mechanics lien is like staking a claim on the property. A lien claim attaches to the property itself.
A mechanics lien gives the claimant an interest in the property itself in an amount equal to the amount s/he is owed. This interest encumbers the property and makes it difficult, if not impossible, for the owner to sell or borrow against the property. And, if the claimant remains unpaid, he or he can enforce the lien through filing suit for a foreclosure action and actually force the sale of the property to recover the amount owed.
Public Projects = Bond Claims
A payment bond is like a wall of money that protects the property itself from lien claims. If a construction party isn’t paid, they can make a claim against the bond.
With a little thought, it is clear why a mechanics lien is not applicable to public projects. Publicly owned property cannot be auctioned off to satisfy a debt. However, since the public policy is clear that construction participants should be protected against nonpayment, and should be paid fairly and timely for the materials and labor furnished to improve property even if the property is publicly owned, there is an alternate form of security – the payment bond – for work on public projects.
On public projects where liens against the property itself are forbidden, the construction participant is protected in one of two ways:
- making a claim against a payment bond
- perfecting a lien against the project funds
Both of these remedies are practically and functionally similar – they both provide security through a claim against a “pile of money” (i.e. surety bond) rather than against a piece of real property.
Exceptions to the rules
There are some caveats to the above general rules, however. The type of remedy might not always be clear, or dictated by some other legal process. Let’s take a look at three exceptions.
Bonded private projects
First, some private/commercial projects are protected by a payment bond. This is sometimes required by the owner to keep the property free of lien claims. In these situations, the remedy for a claimant would be through a bond claim (if the bond is statutorily sufficient) rather than through a mechanics lien.
Second, public-private partnerships, or P3 projects, are projects that can be extremely confusing for determining which remedy applies. Oftentimes, these projects are on public property but with some interest given to a private company in exchange for financing all or part of the work. These can be particularly tricky. Some due diligence ahead of time will be required to properly protect your right to payment.
Third, federal projects are subject to a uniform set of rules and protections through the Federal Miller Act. While the Miller Act is a bond claim process like other, non-federal public projects, the federal rules are standardized and have different requirements than other public project types (such as a state or county project). On the state and local level, these requirements are regulated by that state’s “Little Miller Act.”
Difference by requirements
Besides mechanics liens and payment bond claims being different remedies (in that the claim is against different security), the method to make the claim itself is also different. And, not only are the claims themselves subject to different requirements, but the notice requirements prior to the claim can also be different.
Mechanics liens are generally applicable remedies for a large portion of the participants on most private construction projects. Where there may be some limitation on the ability of a supplier to a supplier to claim a lien, the mechanics lien protection is widely available to just about everyone else, from the prime contractor on down (subject to certain limitations). All applicable claimants utilize the lien right in the exact same way – the claimant can secure the amount they are due through the property itself.
Bond claims, for the most part, are limited to parties other than general contractors. This reason for this is because the claim isn’t against the property, the GC is the party required by the contracting public entity to supply a payment bond providing the payment protection to the other project participants. These typically include second-tier participants and lower; including subcontractors, material suppliers, and equipment lessors. It wouldn’t be appropriate for the GC to make a claim against their own bond, and since the property cannot be encumbered the GC’s remedy is through an action against the public entity rather than through a bond claim.
Generally, preliminary notice (or some other pre-lien notification such as a Notice of Intent to Lien) is required to be sent prior to filing a mechanics lien. While there are exceptions to this rule, it is much more likely that some type of notice is required than it is that no notice is needed. Many bond claims also require notice, but the exceptions are more numerous. Regardless, it’s good practice to send a notice on every project; whether required or not.
Additionally, the parties to whom notice must be sent can be different depending on whether the claimant is claiming a mechanics lien or a bond claim. For mechanics liens, any sort or preliminary notice requirement is generally required to be provided to the property owner (and sometimes the GC and hiring party).
For bond claimants, the most commonly required notice recipient is the GC, with the public entity and the surety company also routinely required. (Since there is no surety on a project without a bond, this is a recipient to whom a mechanics lien claimant would not be required to send a notice).
Recording / filing
An additional difference between the claims is how the claim itself is made.
Mechanics liens, as claim against/encumbrances on the real property itself, must be filed/recorded in the appropriate property records. Depending on the state, this can be a county recorder, the clerk of court, the recorder of deeds/mortgages, etc. The common thread, though, is that the lien must be physically recorded and indexed in the public records so as to be searchable and put the public on record of the encumbrance against the property.
On the other hand, bond claims are very rarely required to be recorded. In most situations, the bond claim is “filed” with the GC/public entity/surety or some combination of those parties. This “filing” requirement only means that the claim must be delivered to those parties by a statutorily sufficient delivery method. And, in some cases, no actual claim document must be delivered prior to initiating a suit against the bond itself.
While the mechanics lien and bond claim remedies are similar in that they both provide security against nonpayment for construction industry participants – there are important differences to consider. The proper use of either though, can ensure payment and help construction companies get paid what they have earned.
Which one is easier to collect against?
So at the end of the day, everyone wants to know which one is easier to collect against. But there is no real answer, one isn’t necessarily easier or harder to deal with. Only the process changes.
A bond claim can be difficult because sureties are big companies with a lot of money. When a bond claim is made, there is usually a long investigation and the claim may ultimately be denied. And, given the amount of money a bonding company can have, they are typically willing to hash out any and all details in court. Therefore, the time frame to collect maybe longer. However, if your claim is a good one, then there isn’t too much to worry about since there is cash put aside for that exact reason.
Mechanics liens can be difficult as well, since it may ultimately end up in court. The lien law process is an incredibly effective way to get paid, and it is exactly that, a long process. Also, if the dispute goes unresolved, there will need to be an enforcement action to foreclose on the property. Depending on the situation of the owner, the value of the property, and other potential interests in it; there’s no guarantee that any money will be left!