Construction industry participants have protections against nonpayment built directly into the laws of every state: mechanics liens for private projects and claims against payment bonds for public projects.
Since public property cannot be liened and foreclosed upon to secure the payment of parties who improve it, every state requires that general contractors provide a payment bond on every project that meets some minimum threshold requirements. This payment bond provides security for subcontractors and suppliers to get paid what they have earned in a very similar manner to a mechanics lien. Whereas a mechanics lien provides an interest in the property being improved, a bond claim provides an interest in what amounts to a pool of money set aside for the purpose of ensuring payment. The pool of money that backs this security is generally provided by a surety.
On an almost universal basis, the surety requires the contractor agree to indemnify it from claims, which means that any claims made against and paid by the bond will eventually be repaid by the contractor, along with any attorney fees incurred by the surety in dealing with the claim. To ensure the contractor will do this, the surety may require the contractor to pledge assets – cash, stocks, or properties – to protect the surety against the risk of the contractor’s default. In the event of a default, the surety can seize these assets without much judicial work, and use those assets to pay any claims. Please read on for a discussion on securing payments through payment bond claims on public construction projects, including some information about proactively communicating with the surety.
How To Make a Bond Claim – Generally
Just like mechanics liens, making a claim against a payment bond is subject to strict procedural and timing requirements. In some cases, even though it seems counter-intuitive, “filing” a bond claim can actually be more complex than recording a mechanics lien. It’s a pretty good guess that a mechanics lien needs to be recorded with the county recorder and served on the property owner, but for bond claims, the requirements are not quite as universal.
Filing a bond claim with the county recorder is not required in very many states – but it is in some. More typically, the bond claim is “filed” by sending it to certain required parties: (generally, the prime contractor, the public entity commissioning the work, and/or potentially the surety).
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Far from being a universally required party, however, the surety is not normally required by statute to receive the bond claim, despite the integral role the surety has in the bond claim process. This means that parties who do send a copy of the claim to the surety, even when not required, may have a leg up on getting paid more quickly, for a number of reasons discussed below.
Don’t Surprise the Surety – Sending Notice of the Claim Gets You Paid More Quickly
As seen above, contractors may have pledged quite a bit to the surety to get the bond. Since they have so much at stake (including their capability of obtaining subsequent bonds – the surety industry works just like the insurance industry, where if claims are made against your policy then you’re harder to insure), GCs generally do not like the surety to be involved at the beginning of the claim process – or even to necessarily find out about it. If the contractor is in financial trouble, the contractor may procrastinate in sending the claim to the surety, or forget about it entirely.
Further, from a purely practical standpoint, if the surety doesn’t have knowledge of a claim until the enforcement lawsuit is filed, the surety isn’t given an opportunity to provide pressure on the paying party or parties to get the claim paid prior to litigation. Waiting until litigation to notify the surety of the claim slows down the claim process, and is expensive in both time and money.
Finally, the surety – when informed – will require back-up information including invoices, contracts, correspondence, change orders, and other supporting materials. Waiting too long to inform the surety disrupts the claim time-table, and may result in enforcement deadlines approaching before the claim has a chance to be resolved. This rush to beat an approaching deadline can make litigation inevitable in situations where the parties simply ran out of time to resolve the issue before heading to court.
While making a bond claim may not help a relationship with a GC, filing the bond claim and resolving the issue before heading to court is likely better than dragging that GC into litigation where they will likely be expected to foot multiple lawyers’ bills and other litigation costs. It’s just smart business to make sure the surety knows that the claim has been made, and work with both the surety and the GC to get the claim resolved prior to litigation. And this can’t be done if the surety is surprised by the claim.