Navigating Bond Notices and Bond Claims on Construction Projects
A payment bond secures a subcontractor’s and a supplier’s right to get paid. If a job is bonded, payment is secured generally by the bond and not by the property.
Depending on the state in which the contractor is working, a copy of the bond may be found in any of the following:
- posted at the job site;
- recorded in the public records of the county where the work is performed;
- on the Notice of Commencement; or
- through the general contractor upon written request via certified mail.
Here is what it is important to know about bonds.
Determine if the is a public or a private project
A private construction project is defined as one where a person or entity holds the title of the property being improved; for example, it is owned by Mr. or Ms. Jones or a corporation or even an LLC. A public construction project, on the other hand, can be defined as one where the property is owned by a governmental entity. A public project might be municipal, state or federal. Examples of state projects are roads, schools, libraries and police stations. Federal projects are on properties owned by the federal government and might include such buildings as naval bases, Veterans Affairs hospitals and post offices.
The government has sovereign immunity
Government properties, and therefore government projects, can’t be liened. That is the reason that bonds are used on public projects. For example, The Smithsonian Museum has a project to replace all the windows in the building. Suppose the general contractor doesn’t pay the window supplier. The remedy for the supplier is to place a claim against the contractor’s bond. The supplier can’t lien the Smithsonian or foreclose on the property.
Five tips to securing bond rights on public jobs
- Determine if the state the project is in requires a preliminary notice to be sent at the beginning of the job. Generally speaking, if hired directly by the general contractor, a subcontractor is not required to send a preliminary notice, but it’s good business practice to send one.
- Generally, a subcontractor or supplier has only 90 days after last furnishing labor or material to send a claim on a bond.
- To assert the claim on a bond, generally a subcontractor or supplier has to file suit within one year of the last work on the job.
- The general contractor is required to carry a bond if the project exceeds $100,000.
- Subcontractors and suppliers can make a claim under the Miller Act if a subcontractor, a material supplier or laborer performing under a contract with the prime contractor (i.e., a first-tier claimant) or a sub-subcontractor, a laborer or material supplier is working under a contract with one of the prime contractor’s subcontractors (i.e., second-tier claimant).
However, no claimant below the second tier of contractual privity can make a Miller Act bond claim. For example, a material supplier to a material supplier has no rights under the Miller Act. As a result, an entity below the second tier should price its work with the understanding that it will not have an available remedy under the Miller Act.
Although daunting, if the subcontractor or supplier first identifies the type of job being undertaken, then categorizes it as one on private or public property, and further determines if the public job is one for a city, state or the federal government, he or she will have the needed roadmap to steer clear of problems.
It’s good practice to seek advice from a bonding and lien professional to ensure that the particular circumstances of the situation will allow payment for the work.
Key points
- Subcontractors and suppliers working on private projects that aren’t bonded can secure their lien rights in the event of nonpayment by liening a property (as long as they meet all statutory timeframes and deadlines).
- If a public project is not bonded, a business decision must be made whether to proceed with the work. Without a bond to secure payment, a subcontractor or supplier does have the remedy of suing on the contract, but there is clearly some risk in proceeding.
- In those instances where subcontractors or suppliers have few options to enforce their rights, they might consider asking for a joint-check agreement so the owner pays them and the contractor at the same time.
Because no project is the same, always remember to seek the guidance of a construction notice professional to be sure it is being done right.
