What is a Surety Bond Claim?
A surety bond claim is a claim made against what amounts to a pile of money that has been set aside for the purpose of ensuring the parties on a construction project get paid. Since certain properties cannot be liened, a bond is obtained to provide a similar type of security for the project participants.
How Do Surety Bond Claims Work?
On construction projects, a “surety bond” is typically a bond provided by a surety, like an insurance company or financial institution, to cover the costs of the project and ensure project completion. Setting aside enough cash to cover the contract value at the start of a project helps facilitate cash flow, and in the event of a cash flow problem, unpaid or late-paid parties can claim a portion of the bond as compensation for work provided.
Contractors, suppliers, and other parties who furnish labor or materials are permitted to file claim against the surety bond if they are unpaid for work they provided to a construction project. Surety bonds are typically set aside on public (municipal, state, and federal) construction projects to ensure contract completion. Mechanics liens serve a parallel function to bond claims on private (residential, commercial, or industrial) construction projects, but mechanics liens claim a stake in the improved property rather than in the surety bond. When the property in question is owned by the government, filing a mechanics lien is not an option.
Different Types of Surety Bond, and When They Apply
There is generally a statutory requirement for surety bonds on public construction projects, though they may also be used on some private projects. Bonds are required since it is impossible for a mechanics lien to encumber property that is not privately owned.
There are two types of bonds commonly used on construction projects: payment bonds and performance bonds.
Payment bonds are issued by general contractors and benefit sub-tier parties such as subcontractors and material suppliers. The bond acts as an insurance policy: if the general contractor cannot or will not pay the parties below, those parties can file a claim against the bond.
Payment bonds are more frequently associated with public projects, though they may sometimes be used on private projects. Use of payment bonds in the private sector is more common for large-scale projects.
Performance bonds protect the government entity/property owner from financial loss in the event that the general contractor does not sufficiently fulfill the contract. If the contractor fails to fully adhere to all agreed-upon terms and conditions, the public entity/property owner may submit a claim against the performance bond.
Public entities frequently require general contractors to post a performance bond as a requisite to bid on a particular project. As mandated by the federal Miller Act, performance bonds must be posted for all public projects with contract value exceeding $100,000.
How to Make a Bond Claim
Unlike mechanics liens which are typically filed with the county in which the project is located, bond claims are not technically ‘filed’. Generally, they are simply mailed to recipients. The key here is not so much the process of submitting a bond claim, but making sure that the bond claim is prepared correctly and made on time.
While the bond’s contractual terms may outline requirements such as deadlines and and formatting standards, it is important to keep in mind that the state or federal law that applies generally overrules contract-specific stipulations.
Want to know what comes next? Read What To Do After You File A Bond Claim.