This blog comes from a webinar that was presented by SunRay Construction Solutions and Alex Barthet. Alex is a board-certified construction lawyer who serves clients in Florida. In this blog we will discuss how to get paid on a public project if there is no construction bond.
Why Is This A Problem?
Imagine that you are a subcontractor, a sub-subcontractor, or a supplier and you are working on a public job. If the contract you sign has a pay-when-paid provision, or you are a little concerned about the creditworthiness of your customer, meaning that you probably did the job because you thought that if you did not get paid by your customer, you would be able to have lien rights, or on a public job, a claim against the payment bond.
You just have to assume that if the project is public that you are going to have rights against that payment bond because you know that you don’t have lien rights on a public job.
You move forward with the job, you deliver your materials; you do your work and then you learn that there is no bond. Unfortunately you learn this too late because you have already done the work and you are already owed the money. So, the question is what do you do now?
That is the problem we are going to try to solve if you are in the middle of the situation when it is too late, and you need to solve the problem. But at the same time, we will give you some good information that you can use to try to avoid the problem from happening in the first place.
What Public Projects Need Bonds?
The first thing that you need to understand is which jobs need bonds. So, in Florida, the following rules apply depending on the following thresholds:
- Between $1 and $200,000, no bond is required.
- From $200,000 to $400,000, a bond is optional.
- From $400,000 and above, a bond is mandatory.
On smaller jobs, you should know that the likelihood of a construction bond existing is low. Whereas for any job above $400,000 a bond is mandatory. This means that the biggest risk comes with smaller jobs. These are ones that are typically less than $400,000, where you run the risk of assuming that the job is bonded only to find out that it is not.
But if you work on federal jobs, the threshold is lower at $100,000. So, any job on a federal which is governed by the Miller Act has a requirement to be bonded over $100,000.
Why Is this Different from Private Projects?
1. On private projects, you can record the lien
For private jobs, as you probably already know, you are able to record a lien if you do not get paid by your customer, and you comply with all the notice requirements that the lien law imposes upon you, you will have recourse against the property.
You can record a lien and then sell the property at a public auction and any equity will be used to pay you the amount of money that you are owed. So, on a public job, you have this potential fallback if you do not get paid.
2. There are no lien rights on public projects
Unfortunately, on public jobs you do not have the right to lien.
How Do I Get Paid If the Project is Not Bonded?
The crux of your recovery is going to be based on your customer and your contract. This will possibly be your only recovery. So, if you have concerns about your customer’s ability to pay you, or if you have concerns about your contract, you need to be worried before you start the job.
There are some other things that you should verify before you start a job:
1. Know if the job is bonded before you start
Verify that the job is in fact bonded if that is one of the reasons or a primary reason why you are willing to do work on or deliver materials to the job.
2. Get a copy of the construction bond from the contractor or public agency
How do you get a copy of the construction bond? There are a number of ways, and the first is to ask the contractor. If you are a sub-subcontractor on a Florida public job, you have the subcontractor above you and then the general contractor above that. So, you may have to ask the general contractor, who may not be your customer.
But the contractor who has the contract with the municipal agency is who is going to be getting the bond if they have to get one. So, you can ask them for it. There is a provision in the statute to request a copy of the bond before you start work. So, you can pick up the phone and call the contractor.
You can also submit a request to the public agency called a Freedom of Information Act request (aka a FOIA request). Any municipal agency that has a copy of the bond is obligated to give it to you within a reasonable amount of time if you make a Freedom of Information Act request.
Every county and school board is different. But many of them just require an email or they have a website. You can call them and they may just give it you over the phone. They may send you an email or you could just go to their office. If the construction bond has been issued and they have it, they will give you a copy.
3. Check the public records
You can also check the public records. A copy of the bonds is supposed to be recorded in the public records where the project is located. So, if you Google “public records ___ county,” or “public records Broward County,” you will get the public records search page for that county.
Once you are there, you can do a search by the contractor’s or surety’s name and if a bond has been recorded and properly indexed by the clerk, it should show up as an item on the list. But again, if you are doing this before the job starts or right when the job starts, it takes some time for the documents to appear in the public records. This can be anywhere between three days and two weeks.
Of all the ways to get a copy of the bond, getting in touch directly with the municipal agency directly to request a bond is probably the fastest and easiest way to do so.
4. Avoid a pay-when-paid contract provision
Another thing you need to consider is to avoid the pay-when-paid provision in your contracts whenever you can. The reason this is important is because if there is a scenario in which you have no rights against a construction bond, you cannot lien a job, and you have agreed in your contract that your only recourse is payment from your customer, an issue will arise if they have not been paid.
A dispute could arise with the owner and the contractor when the former does not want to pay anymore. What if there is a dispute between the contractor and the subcontractor and you are a sub-subcontractor? The subcontractor not being paid will severely limit your rights to get paid.
So, if you are doing work on a public job that is not bonded, signing a contract that has a pay-when-paid provision is very risky.
Dive deeper: Pay-When-Paid Sucks, So Do This to Get Paid Anyway
5. Include a stop work provision
Include a stop work provision in your contract. This means that in your contract, if you have a written agreement, it will have a provision in it that says to the extent you are not paid timely for your draws, that you have the right to slow or stop work. It does not guarantee that you get paid but at least it stops the bleeding, so you do not have to keep working as a project continues if not getting paid.
6. Limit credit risk
You need to limit your credit risk, so if you have a project and you are going to deliver $150,000 worth of materials on this job that has no bond, then you may decide that you are not going to ship any materials beyond whatever you decide. This can be an amount like $25,000, so once you hit that amount, if you are not getting paid and they are not getting any more materials.
So, these are the decisions you need to make in advance because once you deliver the materials and they are incorporated, or you do the work and it is accepted, but you find out you have a problem getting paid, in many instances, it is too late.
So, if you can, limit the amount of materials and work that you deliver and incorporate into the project, before it becomes a big number.
7. Limit shipments
Now if you have delivered materials or incorporated your services into the job and you have no bond rights, your recourse is effectively twofold.
One, you can sue whoever is your customer for breach of contract. Again, there is ideally no pay-when-paid provision in your contract. Because if there is a valid provision, then it is going to limit your ability to recover.
Two, is a claim against the next party up in the chain. That would exclude the municipal government. So, if you are a sub-subcontractor and you have not been paid, you can sue your customer which is the subcontractor.
But you may be able to sue the prime contractor on a theory called “unjust enrichment.” This means that you have delivered materials to the project and they were paid by the municipal agency, but they have not paid you. Therefore, they have been unjustly enriched. As a result, they should pay you directly, skipping over your customer. So unjust enrichment is when someone else receives a benefit from your work and your materials but they did not pay for it.
The risk in this claim is that sometimes the contractor says that he did get paid some or all of the amount from the municipality but that he has a claim against his subcontractor. Maybe he thinks he is owed $200,000 but he had to hire somebody else to do the work and it was defective, or someone was late on the job. Therefore, he thinks that while he was paid by the municipal government that he actually does not owe them the money, and hence he was not unjustly enriched.
That may be a defense that they assert, and it may be a factual issue that would have to be figured out to determine who is right and who is wrong.