This blog has been taken from a webinar hosted by SunRay Construction Solutions, featuring Alex Barthet. Alex is a board-certified construction lawyer who practices and serves clients in the state of Florida. We will be discussing the steps that you need to take in order to secure your bond rights, and then once you do that, what you need to do so that you can actually get paid.
What Is A Payment Bond Claim?
A payment bond secures a lienor’s right to payment on a construction project in lieu of a lien. If you don not get paid, you put an encumbrance on the property equal to the value that you have improved the property. So, let us say that you are a material supplier and you deliver $50,000 worth of electrical fixtures that get incorporated into the project. If you are not paid, then you could put a lien on the property and sell the property. You would then be entitled to recover from the equity of the property the amount that you are owed.
Instead of a claim on the property, the lienor has a claim against the surety bond
That is the concept of a lien. But there are instances in which (1) you may not have lien rights, or (2) the owner has taken steps to exempt the property from liens. In both of those instances you will have a right against a payment bond. For example, if you were to do public projects, like work at a public school, you don’t have a lien right in public property. So that job is going to be bonded.
Reference to the payment bond should be made in the Notice of Commencement
On a condominium or a big commercial project, the owner may require the owner to get a payment bond on that project. So, then your recovery is not against the property, it is against that payment bond. How do you know the job is bonded?
If you pull the Notice of Commencement it should be recorded in the public record in the county where the project is located. Or a copy is supposed to be on the job site posted with the permit. It should make reference to the bond company. So, there is a little line that says surety and maybe it says Hartford, Travelers or Continental, that is how you know the job is bonded.
Now if you use SunRay to do your notices, we do all of that research for you and make sure that that surety gets a copy of the first and second notice which we are going to talk about next.
Know more: I've Received a Claim on my Payment or Performance Bond! Now What?
What Are the Bond Claim Deadlines?
Now we will talk about the deadlines that you need to follow to make sure that you secure your right to get paid on a payment bond claim. Let us break these down into two big categories:
1. Private bonded projects
This project has a payment bond on it, so we will now run through the timeframes for this scenario because they are slightly different for a public project which we will talk about next.
- If you have a direct contract with the bonded prime contractor, like if the owner hires a general contractor who posts a bond and you are the plumber, you have a direct contract the bonded contractor.
You do not need to send that first Notice to Owner/Notice to Contractor. That being said, you are strongly encouraged to send a notice in that situation. You should have a process in your office that any job over a certain amount gets bonded. Maybe it is $500, maybe it’s $2,500 or even $5,000. Whatever you decide on, you should make it a habit that no matter what, you are going to notice those jobs.
People usually make mistakes when the rules sometimes require a notice and others do not, and they think that they do not need to send a notice, so they do not. Invariably, they make a mistake on the job that needed a notice. They end up not sending one and then lose their lien rights.
So, ensure that you pick a dollar amount in your office every and every job over that amount, you should notice no matter what. And it needs to be received by the surety and contractor no later than 45 days from your first work.
- You need to file a lawsuit on the payment bond within one year from your last work or delivery of materials. These are the primary rules that you need to be aware of.
- If you do not have a direct contract with the bonded contractor, here is another example. If you are a sub-subcontractor, or a supplier to a subcontractor, you need to serve the Notice to Owner/Notice to Contractor within 45 days of your first delivery of materials to the project or work on the project. This is the latest date by which it needs to be in the hands of both the contractor and the surety. But you should not be waiting this long at all.
- If you use SunRay, you get it to us early, and we get it to the post office by the 40th day from your first work, it is deemed delivered whether it actually gets there or not. So that is a very important reason why you want to do it early. You cannot do it any earlier than when you have the contract, but you cannot do it any later than having it in the hands of the contractor and their surety by the 45th day. Remember that it takes several days of mail to get it to them via certified mail. So, you want to do it early.
- The next step is the Notice of Nonpayment that needs to be served on the contractor and the surety no later than 90 days from your last work on the project or delivery of materials to the project. Remember that last work does not include punch list work or warranty work. So if you are the electrician and you go back, you finish all your contract work, you do all your change order work, and they call you back a week after that to fix something that was not working, then your last date of work is not the last day you went back. It was the week before when you finished the actual contract or change order work.
- You need to file suit within one year from your last date of delivery of materials or work on the job.
- If you are a sub-subcontractor or a material supplier to a subcontractor, sometimes the contractor requires the subcontractor to get a bond. That subcontractor bond is not recorded in the public records. So, the way you need to be aware that it may exist, and the way you get it, is by making a request in writing to the contractor to see if the subcontractor has a bond.
For example, an owner hires a contractor, and that contractor gets a bond. That bond is in the public record. But maybe it is a very big job, and they decide to get a roofer to post a bond as well. So, the roofer gives a payment bond as well and that bond gets handed to the contractor. A copy is also sent to the owner, but it is never recorded. If you are the supplier to the roofer, you may have a claim if you are not paid against both the roofer’s payment bond and the contractor’s payment bond. But you need to get a copy of that roofer’s payment bond. And the way you do that is, you make a request to the contractor to send you a copy.
2. State Public Bonded Projects
Now let us talk about public projects and how the rules are a little different
- If you have a contract with a bonded prime contractor, let’s say the school board hires the contractor who hires you and you are the electrician. You do not need to send a Notice to Owner/Notice to Contractor again. This is the first notice; the one that normally needs to be sent within 45 days. Again, it is strongly recommended that you do so no matter what.
- Surprisingly to many people, you do not need to send the Notice of Nonpayment, but it is strongly encouraged that you do. So if you are the electrician to the bonded contractor on a public job, you do not need to send the first notice, or the second notice (the Notice of Nonpayment).
- Your only requirement is that you need to file suit within one year from your last work or last delivery of materials to the job site. Send the first Notice to Owner and the Notice of Nonpayment.
- If you are further down the chain, let us say you are a sub-subcontractor, now you need to send both notices. So you need to send that first Notice to Owner/Notice to Contractor within 45 days of your first work. If you are able to get your notice to SunRay early, they will take it to the post office by the 40th day and they will have the manifest stamped by the post office. Then it is automatically being delivered even if it never gets there, because maybe the post office made a mistake.
But again, that requires that you do it early. You need to serve the Notice of Nonpayment within 90 days of your last work or last delivery of materials. You need to file suit within one year. As mentioned before, if you are even further down the chain, like maybe a supplier to a subcontractor or sub-subcontractor, the subcontractor (the roofer, the electrician, the plumber) may have their own bond which you should try to get a copy of by making a written request to the contractor for the subcontractor’s bond.
The New Notice of Non-Payment Form
Now we will talk about this new form. Effective October 1, 2019, you need to use this new form for the Notice of Nonpayment. The old form used to read like a letter. It just said that you did work on the project and here is how much you are owed, but the new form has a lot more detail. It looks more like a Claim of Lien, and it needs to be notarized.
If you use SunRay, all of our forms are updated as the statutes change. So since October 1 of 2019, the SunRay system has had the new Notice of Nonpayment form.
Now here are some of the biggest changes to the form:
- The form must be made under oath, and you need to notarize it.
- The notice needs to include, as of the date of the notice, the following information:
- The nature of the labor or services performed or to be performed;
- The materials furnished or to be furnished;
- The amount paid on the account;
- The amount owed; and
- If known, the amount to become due – this is the incomplete portion of the contract at the point when you serve the notice. It could be zero or even $100,000.
- It also requires that you include the amount of retainage that is owed at that point in time on the job. So, if you are owed $100,000, out of which $50,000 is retainage, then you need to put that in the notice.
The new form looks a lot more like the lien. It gets served instead of recorded on the contractor and surety. And it has all of these blanks that you need to fill in. One of the most significant changes is that it now needs to be notarized before it is served.
How to Get Paid After Making A Bond Claim
Now we will talk about how you can get paid after making a construction bond claim.
- The first thing that you have to remember is that the Notice of Nonpayment only starts the process. Just like the lien does not automatically mean that you get paid, because you would have to sue someone to foreclose on the property, the Notice of Nonpayment works in the same way.
Step one of the process is when you give the contractor and the surety notice that you are owed money. Many folks believe that because they served their Notice of Nonpayment, they will automatically get paid. But it is not like an insurance claim.
- What you typically receive once you serve a Notice of Nonpayment is a letter from the surety. It will thank you for the claim, ask for you to fill out a Proof of Claim form, and to send it back with the backup information. You are more than welcome to do that if you believe that that is going to get you paid.
- Understand that in almost every situation, there is almost no obligation to provide that Proof of Claim.
- In most instances, not every instance, you will be told not to provide the Proof of Claim since it rarely gets you paid just by submitting it.
- Most sureties do not voluntarily pay you unless the principle or the contractor himself or herself, agrees to pay you first. And the reason why is because the relationships that exist for bond surety is not insurance. It is a credit instrument. So, when the surety writes you a check for your claim, they look to the contractor and they tell the general contractor that they had to pay the roofer $50,000 on the bond claim, and they want you to now give them back the $50,000. So, while there is a bond premium that is paid, they also look to a whole.
When you get into a car accident and your insurance company writes you a check for $10,000, they won’t come back to you and tell you to give them the money back. Your premiums may go up, but it is not an indemnity product. You do not have to reimburse the insurance company. But this is not the way it works with sureties.
Sureties look to be made whole from their principal or whoever got the bond. So, when the surety pays you, they want their money back from the principal. Because of that relationship and that tension, most charities do not pay claims until the principal agrees to pay the claim, or the principal may go out of business. This is why the mere submission of a claim to a surety does not automatically mean that you get paid.
- Sometimes, contractors and sureties can shorten the time to file the lawsuit. Remember that there is one year from your last work on the project to file one. You will get a notice in the mail or a lawsuit shortening the time. Be very aware of those notices because usually it is either shortened to 60 days, which is what you will get in the mail. Or it could be shortened to 20 days if you get served with a lawsuit. You have to be very careful because if you do not timely respond to those claims by filing your own lawsuit, you will lose your claim against the payment bond.
- Also watch out for a surety waiting you out for the one year. For example, let us say someone is owed $100,000. She submits a claim to the surety and engages with them back and forth over every month or two. The surety asks for more information and she submits it to them. Another two months go by and the person asks for an update. The surety says they are still investigating and then one year and around a month after, which is the last work on the project by the person, the surety sends a letter saying that they reviewed the claim but denied it because now it is time barred. The person thought that the back and forth was producing results. But they were just waiting her out. The year passes, the claim was denied, and the person was left without a recourse. So be very careful.
What happened here was the surety said they were still investigating and then one year and around a month after, which is the last work on the project by the person, the surety sent a letter saying that they reviewed the claim but denied it because now it was time barred. The person thought that the back and forth was producing results. But they were just waiting her out. The year passes, the claim was denied, and the person was left without a recourse. So be very careful.
When it comes to getting paid, you should practice what is called the 60/60 rule. This means that at around Day 60 from your last work on the job is when you should start to think about and prepare your Notice of Nonpayment. Do not wait until Day 70, 80 or 88 because it takes time to prepare the notice, fill in the information, notarize it, and send it via certified mail.
You should be starting that process at about Day 60 from your last work on the job. Then for the next 60 days you should hassle your customer (the surety), by sending letters, emails and making phone calls. You need to be a thorn in their side. But around 60 days after your notice, if you have not made progress and you decide that you want to continue this collection process, waiting is not going to get you paid.
If you have not been able to shake the money loose on your own by hassling them for 60 days, you need to hire a construction lawyer to file a lawsuit and collect that debt for you. Be very careful of unsolicited requests made upon you. It is seen a lot in collection agencies out of Texas. They will tell you that they will be able to get you paid, that it will not cost you anything and that they have some inside track. All of these unsolicited offers to pay you and collect your debt, are scams.
Unless you have a business reason, you should not delay in collecting your bond claim, lien claim, or any other collection efforts that you have. It is not like wine and does not get better with age. It gets much harder to collect your debts, the older they are.