Public works projects don’t have the same security that private ones do. Payment bonds are often present to replace mechanics lien rights, but bond claims don’t always have the same force as liens. Plus, depending on the size of the project, a bond might not be present at all. That will come down to your state’s payment bond threshold.
Payment bonds aren’t always required on public works projects
Most public projects will have a payment bond present. However, for smaller public works jobs, there’s a strong chance no bond will be present.
Every state has a threshold for determining whether payment bonds, bid bonds, and performance bonds will be required. Meaning, if the project’s contract price exceeds a certain number (what we’re calling the “bond threshold”), then bonds will be required. That threshold can vary greatly – it’s not uncommon for the number to be in low five-figures, and it’s also common for the threshold to exceed $100,000.
Many states recently raised their payment bond threshold
Naturally, bond thresholds have been increasing over time. That makes sense – construction costs are always rising, and inflation is ever-present. But the fact that it’s “natural” for bond thresholds to rise is no consolation for those who perform work on an unbonded project.
Here are a few states where bond thresholds have risen, lately:
Wyoming raised its payment bond threshold from $7,500 (which was really low) to $50,000 (which is still fairly low). Still, that represents an almost 7x increase! For subcontractors, suppliers, and equipment rental companies on Wyoming public projects under $50,000, a payment bond claim will likely not be an available option if there’s a dispute somewhere along the way.
More on Wyoming payment bonds and bond claims: Wyoming Bond Claim Guide and FAQs.
Kentucky raised its payment bond threshold from $25,000 (fairly low) to $100,000 (pretty standard). While the $100k mark isn’t abnormal – look at that jump! The payment bond threshold for Kentucky public projects quadrupled! On projects under $100,000, Kentucky sub-tier claimants probably won’t be able to make a payment bond claim to secure their right to payment.
More on Kentucky payment bonds and bond claims: Kentucky Bond Claim Guide and FAQs.
Rhode Island’s payment bond threshold tripled – going from $50,000 (on the lower end) to $150,000 (on the higher end). A $150,000 project is a pretty large undertaking to not have a payment bond present.
More on Rhode Island payment bonds and bond claims: Rhode Island Bond Claim Guide and FAQs.
Missouri’s payment bond threshold went from $25,000 (relatively low) to $50,000 (still on the lower end). So, even on small Missouri public works projects, payment bond protection will be available. While $50,000 is still a pretty low payment bond threshold, it did double.
More on Missouri bonds and bond claims: Missouri Bond Claim Guide and FAQs.
The Arkansas payment bond threshold made the smallest jump of these states – from $20,000 (low) to $35,000 (still low). That’s good news for subs, suppliers, and equipment rental companies in the state. Most Arkansas public works projects will be protected by payment bonds.
More on Arkansas payment bonds and bond claims: Missouri Bond Claim Guide and FAQs.
Recent articles on payment bond requirements:
- New Legislation Allows Payment Bonds on Mississippi Private Projects
- Missouri Payment Bond Requirements Overhauled by New Legislation
- New Colorado Payment Bond Requirements Create Protections for P3’s
How can a subcontractor tell if their project is bonded?
There are a few different ways to figure out if your project is bonded…
Ask if the project is bonded before accepting the job
This one’s simple – just ask! It makes sense to ask whether the project is bonded before even deciding whether to accept the job. Plus, everyone’s friendlier at the start of work. If you ask about bonding later on, you might run into a brick wall – for one reason or another, other participants might be less willing to share information.
Check your contract for any mention of a payment bond
Naturally, you should be using a written contract for every job. But, in that written contract, check for any mention of a payment bond or lien rights. The contract might be silent as to whether there’s any payment bond present, but it might not be. But, even if the contract is silent about bonding, it will probably mention something about the project that might help to determine whether it’s bonded – like the public agency involved.
Request a copy of the bond with your preliminary notice
We’ll touch on this later, but it’s a good idea to send a preliminary notice on every job – regardless of whether it’s required. Preliminary notices start the job off on the right foot by establishing some crucial project visibility, opening lines of communication, and fostering a collaborative atmosphere. Plus contractors should love receiving preliminary notices. But, on public works projects, there’s another key angle.
In most states, a sub or supplier is entitled to a copy of the bond if they simply ask for one in writing. So, by including that request with a preliminary notice, that sub or supplier will then be entitled to receive a copy of the bond, if one is present on the project. So, there’s another way to figure out whether the project is bonded – if a copy isn’t given after it’s requested in the prelim, there might not be a bond on the project.
Note, though, that this is just another part of setting up the job in your back office. Requesting payment bond information isn’t adversarial – it’s just good business.
Ask the public agency if the project is bonded
It’s a good idea to send a preliminary notice to the public entity, too. That way – they’ll know everyone who’s on the job, and if problems do start popping up, the agency can better communicate. Including a request for bonding info is helpful here, too.
While some states require a contractor to provide a copy of the bond upon request, others require the public entity to do the same. Plus, even if they aren’t required to provide the information – they still might provide it anyway.
What should subcontractors do if the project doesn’t meet the payment bond threshold?
Just because a project isn’t bonded doesn’t mean it’s not worth working on. But, it does mean it’s that much more important to create a healthy environment on the project. Here are some things that can help ensure payments are made, as required, on an unbonded project.
Prequalify the prime contractor and your customer
It’s a good idea to prequalify the prime contractor and/or your customer on just about every project. It’s not out of distrust – rather, it’s an exercise in the “trust, but verify” line of thinking. Even when you’re comfortable with the prime contractor, it’s a good idea to follow up on their business to see if any red flags have begun popping up lately.
- Has this contractor had any safety issues recently?
- How’s their business doing?
- Are they stretched too thin?
- Is this contractor having payment problems on another job?
- What are their other subcontractors and vendors saying about them?
All of these questions are important, and that’s just the tip of the iceberg.
Discover a contractor’s payment reputation and leave your own reviews:
Send preliminary notices to create healthier projects
We discussed this above, but it’s worth reiterating: It’s a good idea to send preliminary notice on every job. Prelims create healthy projects by establishing a collaborative atmosphere from the jump. They increase project visibility, which decreases risk for contractors and owners. And, they open the initial line of communication. By sending a notice from the start, it’s easier for others on the job to reach out if they need to talk about the job.
On a project where there’s no bond protection, it’s absolutely crucial that the project starts healthy and stays that way. The best way to set the tone for a transparent, collaborative, and communicative project is to set the tone with a preliminary notice. Importantly: We’ve found that companies who regularly send preliminary notices need to make fewer payment claims.
Solidify your company’s credit policy
Hope is not a strategy. Construction businesses should create a plan of attack in case payments go awry on every project. Usually, this will include a mechanics lien policy or a bond claim policy. But, a credit policy goes far beyond that.
A sound credit policy should determine what actions will be taken and when. It will determine your company’s appetite for risk, and the policy will dictate what actions you’re willing to take to collect payment – and when you’ll take them. When such a big payment recovery tool – like a bond claim – goes off the table, it’s that much more important to have an organized plan of attack in place for when something goes wrong.
As payment bond thresholds rise, prelims become more important
Just because the project doesn’t have a payment bond doesn’t mean it’s not worth bidding on. No, it just means that extra care should be taken for the project – and that it’s crucial to do your part in creating a healthy payment chain. As discussed above, the first step toward building a healthy project is to send a preliminary notice.