What are Payment Bond Claims in Construction Projects?

In this blog post, we will understand the intricacies of payment bond claims, explaining what they are and how they function in the world of construction. Read on!

What is a Payment Bond Claim?

A payment bond is a crucial element of a construction project that serves as an alternative to a traditional lien. It safeguards the right of a lienor—such as a subcontractor or material supplier—to receive payment for their contributions to the project. Rather than placing a direct lien on the property, a payment bond claim allows the unpaid party to seek compensation by making a claim against the surety bond associated with the project.

When a party does not receive the compensation, they are owed, they can initiate a payment bond claim. For instance, imagine you are a material supplier who has delivered $50,000 worth of electrical fixtures that have been incorporated into a construction project. If you do not receive payment for your supplies, you have the option to place a lien on the property and potentially sell it to recover the owed amount from the property's equity.

What is the Role of Payment Bond Claims in Various Projects?

Payment bond claims are especially relevant in situations where traditional lien rights may not apply or where the property has been exempted from liens. For example, when working on public projects like schools, traditional lien rights might not extend to public property. In such cases, the project is typically bonded, offering an alternative means for contractors and suppliers to secure their payment.

How to identify a Bonded Project?

One of the challenges is determining whether a project is bonded. A simple way to establish this is by referencing the Notice of Commencement, which is usually recorded in the public records of the county where the project is located. This notice often contains information about the bond company backing the project. Additionally, a copy of the Notice of Commencement, along with bond-related details, might be posted on the job site alongside the permit.

What are the Deadlines for Bond Claims?

Understanding the deadlines associated with payment bond claims is crucial for securing payment. The timeline varies depending on the type of project, whether it's a private bonded project or a state public bonded project.

1. Private Bonded Projects

Private projects equipped with payment bonds require meticulous adherence to deadlines to safeguard your payment rights. Let's delve into the details of this process, which slightly varies from that of public projects, discussed subsequently.

General Guidelines:

• Direct Contracts with Bonded Prime Contractors: If you're directly contracted with the bonded prime contractor, the initial Notice to Owner / Notice to Contractor might not be obligatory. Nevertheless, it is highly recommended to send this notice within 45 days from your project's commencement to establish a clear communication trail.
• No Direct Contract: In cases where there isn't a direct contract with the bonded contractor, prompt action is necessary. For instance, sub-subcontractors or suppliers to subcontractors must serve the Notice to Owner / Notice to Contractor within 45 days from the first material delivery or work on the project. Ensuring that both the contractor and the surety receive the notice within this timeframe is essential.
• Notice of Nonpayment: This notice must be sent to both the contractor and the surety within 90 days from the last work or material delivery. Notably, this timeline excludes punch list or warranty work.
• Lawsuit Filing: The deadline for filing a lawsuit on the payment bond is within one year from the last date of material delivery or work completion on the job.
• Subcontractor's Bonds: If you're a sub-subcontractor or material supplier to a subcontractor, a written request to the contractor is necessary to determine whether a subcontractor bond exists. This bond isn't publicly recorded, highlighting the importance of proactive communication.

2. State Public Bonded Projects

In the context of state public bonded projects, the rules present a slightly different framework.

General Guidelines:

• Contracts with Bonded Prime Contractors: If your contract involves a bonded prime contractor for a public project, sending a Notice to Owner / Notice to Contractor again might not be mandatory. However, sending these notices is strongly recommended to maintain clarity and transparency.
• Notice of Nonpayment: Surprisingly, the Notice of Nonpayment isn't a strict requirement for bonded contractors working on public projects. Nonetheless, sending this notice is still highly advised.
• Lawsuit Filing: The key requirement in such cases is filing a lawsuit within one year from the last work or final material delivery.
• Further Down the Chain: If you're a sub-subcontractor or similar, sending both the initial notice and the Notice of Nonpayment is essential. These notices must be sent within specific timelines to ensure your payment rights.

Whether dealing with private bonded projects or state public bonded projects, adhering to these timelines and procedures can make a significant difference in ensuring successful compensation.

Conclusion

Payment bond claims provide a lifeline for contractors, subcontractors, and material suppliers to secure the compensation they deserve for their contributions to construction projects. Understanding all the details of these claims, along with the associated deadlines, is essential for ensuring timely payments in the complex world of construction. Whether it's a private bonded project or a state public bonded project, adhering to these procedures can make all the difference in securing your rightful payment.