Bonds, at least as related to construction projects, can be divided into three primary types: bid bonds, performance bonds, and payment bonds. This article will discuss payment bonds, and mistakes to avoid in making or defending a payment bond claim. First, though, what is a payment bond? In general terms, a payment bond is a surety bond posted by a general contractor that guarantees payment to subs and suppliers. On a project on which a payment bond is required, the purpose of the bond is to ensure the payment of parties lower on the contractual/payment chain than the contractor obtaining the bond.
When payment bonds are required depends on the nature of the project and, potentially, the state in which the project is located. Payment bonds are required on federal projects in which the initial contract exceeds $30,000, and by every state on public construction projects that meet or exceed a certain specific threshold value. The baseline value of state/municipal projects that require a payment bond is set by each state individually, and ranges from $0 to $500,000 or more.
While the majority of payment bonds are provided on public projects – whether they are federal, state, or municipal – they are not limited to projects of that nature. Private projects can be bonded, as well. This, however, is more rare as the general means of securing extensions of credit on a private project is through the use of mechanics liens. Generally speaking, a payment bond provides analogous security on a public project that the property itself generally provides on a private project. If parties on the low end of the payment chain are not paid, the bond provides security against which they can make their claim for payment.
Bond Claim Mistakes to Avoid
Most of the common mistakes to avoid in the bond claim process spring from the complexities of the process itself, or from the mistaken belief that mere compliance with the requirements will best position a claimant to be paid.
Preliminary Notice – Making a Bond Claim
Many states mandate preliminary notice to be sent within a certain time period, or any subsequent bond claim may be invalid. Failing to provide this notice when required, in the manner required, and to the parties required, is a common mistake for parties making a bond claim.
In order to best protect the ability to make a valid bond claim, and to get paid, the claimant should review the laws of the project state, and provide any required notice.
Preliminary Notice – Defending a Bond Claim
The same preliminary notice requirements that are a headache for subs and suppliers to comply with work in favor of the party defending a bond claim. But, knowledge of the requirements is useful for defensive purposes. The fact that that party doesn’t need to give the notices is not an excuse to be ignorant of the specific requirements. It’s important for the general contractor to be aware of the notice requirements in order to best position itself in defending a potential claim. If notice is required, and not received within the mandated time period, defending any subsequent claim against the bond becomes that much easier. If a bond claim is made, the information that no required notice was provided can be given to the surety at the same time it is notified of the claim.
“Filing” – Making a Bond Claim
Just as with providing preliminary notice, actually making a bond claim is technically precise and subject to specific requirements. If an actual Notice of Claim is required, the bond claim must be made within a certain amount of time. Missing this deadline should be completely avoidable, with good time management and a knowledge of the project state’s bond law, but it remains a common mistake that invalidates many claims. Just like with preliminary notice, this mistake can be avoided by a thorough review of the laws of the project state.
not only must the claim be provided to certain parties – the claim should be provided to additional parties, as well
Finally, once the claim has made its way to the surety, more information will likely be required prior to any payment being forthcoming. Because of this, information and documents that back up the claim should always be retained, and should be provided to the surety quickly when requested. After the information has been provided, the claimant should routinely check in with the surety claim representative to check on the status of the claim, and see if anything else is needed. Many companies fail to take these easy steps even though the amount of energy necessary to do so is routinely paid off in the claim being paid more quickly and without the need to file suit.
“Filing” – Defending a Bond Claim
For parties defending a bond claim, the same considerations given to preliminary notice should be given here. A failure of the claimant to completely comply with the state’s specific rules can invalidate the claim. A bonded contractor that is aware of the rules is in a much better position to defend itself than a contractor that isn’t.
Sureties will generally stick with the bonded contractors arguments if they are well documented, and well organized
Also, it is too common for prime contractors to wait to provide the surety with notice of the claim itself. This is a mistake. Sitting on a bond claim and not providing it to the surety can strain the relationship between the bonded contractor and the surety. Further, the requirements of the bond will generally specifically require the prime contractor to notify the surety of any bond claim within a certain time period. Failure to do so can provide the surety with a defense to paying the claim, and this means that 100% of the liability (and, potentially, the legal costs of the surety) will be passed on to the prime contractor. This can be avoided simply by passing the claim along when received.
Bond claims can be tricky, both to successfully make and to successfully defend, but keeping these common bond claim mistakes in mind so they can be avoided could potentially be the difference between success and failure.