Bond Claim Nitty-Gritties: The 5 W’s and 1 H
Ahh, payment bonds and bond claims; a payment security often available for those furnishing to public and federal projects and even the occasional private construction projects. Before you can exercise your bond claim rights, you need to be familiar with the 5 W’s of bond claims.
I know the 5 W’s usually go in a certain order: who, what, when, where and why. I also know there is 1 H: how. But let’s shake it up and tackle the 5 W’s (and 1 H) in a different order: what, why, who, when, where, with some how’s throughout.
WHAT is a Payment Bond?
Before we head to bond claims, we need to understand payment bonds. After all, without a payment bond, a bond claim doesn’t exist.
Generally, public and federal construction projects require general contractors to obtain a payment bond. The payment bond is issued as assurance of payment to certain parties should the principal of the bond breach their construction contract.
WHO is a party to the Payment Bond?
There are three primary parties tied to a payment bond:
- Obligee: The party protected by a bond, the one who requires the bond to be furnished.
- Obligor aka Principal: An entity that has an obligation to pay a debt/the party required to furnish a payment bond.
Example: where the obligee is the owner, the principal is the prime contractor; where the obligee is the prime contractor, the principal is the subcontractor.
- Surety: One who agrees to answer for the debt or default of another, usually an insurance company that is compensated for the risk by charging a premium.
Wait, HOW do I know if a Payment Bond has been issued?
You may find it easiest to contact the project owner to confirm whether a payment bond was required and if one was required, ask to be provided with a copy. My advice? Make this request at the beginning of the project when everyone is happy — don’t wait until there are payment issues, because folks are less inclined to share.
How: As a best practice, include language requesting a copy of a payment bond within your preliminary notice. Here’s some sample wording
To Whom It May Concern:
We are writing to you in connection with the above project, where we have contracted with ABC Company to furnish materials (pieces, parts and thingamajigs). We ask that you please forward a copy of any payment bond(s) for this project to the undersigned. Thank you for your assistance.
WHAT are Payment Bond variations?
Each state has its own statute requiring payment bonds on public projects and the Miller Act applies to payment bonds required on federal construction projects. Some statutes may require the general contractor obtain a payment bond on every construction project, and other statutes may only require a payment bond when the total value of the construction project exceeds a certain threshold.
For federal projects, generally if the construction contract is less than $100,000 but more than $25,000, the contracting officer and prime contractor must agree to a payment protection of:
- A payment bond
- An irrevocable letter of credit
- A tripartite escrow agreement (a federally insured financial institution distributes payments); or
- A certificate of deposit
However, be aware these requirements may be waived on certain federal projects.
WHAT is a Bond Claim?
A Bond Claim is a written notice that the claimant (e.g. subcontractor, supplier or materialman) looks to the recipient for payment.
WHY serve a Bond Claim?
Why? Because it’s your right to be paid! There are laws (aka statutes) in place to protect your payment rights. Carefully comply with statute and serve a bond claim to recover your claim.
WHO should receive the Bond Claim?
Based on state statute, typically the bond claim must be served upon the general contractor and the surety, however, it is recommended to serve a copy of the bond claim on all parties involved. The more people that know you have not been paid, the more pressure these people will put on the appropriate party to encourage payment.
WHEN to serve a Bond Claim?
Frequently, a bond claim notice must be served within 90 days from last furnishing materials or services (e.g. Arizona). However, some state statutes, such as in Colorado, refer the claimant to the terms of the payment bond. (i.e. “Serve the bond claim notice in accordance with the terms and conditions of the payment bond.”) Non-Statutory Bonds, such as those obtained by a subcontractor, also look to the terms of the payment bond.
HOW to serve the Bond Claim?
Check the statutory requirements to be certain. Typically, bond claims can be served via certified mail and as a best practice, request the return receipt. In cases where you are close to the deadline, consider also serving the claim via overnight service or personal server.
HOW about some best practice tips?
- If a there is a payment bond on the project, attempt to obtain a copy of the bond at the time of contract.
- Confirm the surety is on the Department of the Treasury’s Listing of Approved Sureties.
- Review the payment bond, along with statute, to ensure you are covered as a potential claimant.
- Serve applicable preliminary notices in accordance with statute.
- If you remain unpaid, serve a copy of the bond claim upon all parties.
- Keep all project documentation in a central location (e.g. invoices, delivery tickets, statement of account etc.)