Payment bond claims are among the most common types of claims against contract surety bonds. Along with performance bond claims, they are also among the costliest and potentially most disruptive actions that can be brought against a contractor.
At the same time, payment bonds cannot be avoided. Both federal, state, and private parties regularly require contractors to post a payment bond prior to beginning work on a project. What’s more, recently at least two states have adopted laws that make general contractors liable for payment bond claims brought against their subcontractors.
In that context, and given the increased risk for contractors facing such regulations, what is the best course of action to avoid a claim?
Why Do Contractors Need Payment Bonds?
Payment bonds guarantees that contractors will pay their subcontractors, material suppliers and laborers anything that they owe them for their services.
On federal and state construction projects, payment bonds are required of contractors on the basis of the Miller Act. Under the Miller Act, contractors on any federal project that exceeds 0,000 are required to obtain payment and performance bonds.
Private construction project owners also frequently require their contractors to post a payment bond. Moreover, more stringent rules regarding the liability of general contractors under a payment bond claim have been adopted over the last year in California and Maryland, and other states are likely to follow.
Senate Bill 853 in Maryland and California Assembly Bill 1701 make general contractors on private projects liable for payment bond claims brought against their subcontractors. This may even apply in cases in which a general contractor has already provided payment to the subcontractor.
With all that in mind, it is crucial for contractors to take precautionary measures to avoid giving rise to claims against their bonds.
How to Avoid Payment Bond Claims
Carefully draft contracts
Avoiding a payment bond claim begins at the moment the contractor is about to enter into agreements with subcontractors. When drafting the agreement, make sure to clearly specify obligations and responsibilities, as well as the time frames within which the company agrees to operate. Also, include clauses and conditions to protect the company in cases in which it is being held liable for conflicts between subcontractors. A clear and specific agreement can save the company from having to contest breaches of contract due to unclear language.
Meticulously document everything
The more documentation that can be provided during a dispute or if a dispute should go to court, the more likely the ability to defend the case. Documentation should include all kinds of correspondence, photographs, checks, records of payment, etc. The same meticulous approach should be taken when disputing a subcontractor’s claim to payment. Documenting the dispute can help the company and the surety handle the situation, in particular if the claim is not legitimate. Moreover, proper documentation can also help in cases in which claims are filed after the legally permissible time limit. Having an overview of the timeline of events can help challenge claims that have no legal bearing.
Communicate frequently
While clear and detailed contract language is key, it is not enough in terms of communication. Lack of communication between contractors often leads to differing expectations. Ideally, communicate often and frequently with subcontractors, suppliers and laborers in order to be on the same page and avoid misunderstandings. With an increasingly greater adoption of various forms of technologies on construction sites, real-time communication has become much easier. Smart contractors use it to their advantage.
Frequent communication with the surety is also important. In particular, if the company is experiencing difficulties, delays or knows it has violated contract conditions, contact the surety in a timely manner. Sureties often have extensive background in handling such situations and may be able to give good advice or take specific measures to help avoid a claim.
Do not withhold payment unfairly
Some contractors commit the mistake of offsetting their obligations on one project because of bad subcontractor performance on another project. This applies in particular to those contractors who have the same partners on several projects. Withholding payment on one project to make up for the bad job done on another can ultimately result in a claim against the bond. Non-payment is viewed by a court as what it is, regardless of the quality of performance of the claimant elsewhere. Therefore, always take care of obligations, in accordance with the terms of the contract, and challenge bad quality as a separate issue.
Work with the right partners
Professionalism, reliability and a good track record speak for themselves. Building a solid relationship with subcontractors by working together over time is one of the best ways to protect the company from claims that may arise due to a lack of trust. While this may take time and efforts, it is also a key in building up a good and stable business.
Try to reach a settlement
If all else fails, it is usually better to attempt to negotiate and reach a settlement before the situation escalates to a claim or ends up in court. This applies even to cases in which the sum of the settlement and that of the claim may be more or less the same. It is important that in reaching a settlement, its conditions are spelled out clearly in the settlement agreement, so as to avoid further disputes due to ambiguity.
