Construction projects for the Federal Government, and also generally for State and local governments, provide workers and suppliers a guarantee of payment by the posting of payment and performance bonds. This gives the contractors and material suppliers on a project a mechanism to protect their right to be paid without having to file a mechanic’s lien and foreclose against government property. Payment and performance bonds are generally issued together, but let’s look at each one closely so you understand their purpose.
Construction projects for the Federal Government, and also generally for State and local governments, provide workers and suppliers a guarantee of payment by the posting of payment and performance bonds. Contractors and material suppliers are provided a mechanism to protect their right to be paid without having to file a mechanic’s lien and foreclose against government property. Payment and performance bonds are generally issued together, but we will examine each closely to understand their purpose.
How do we ensure that everyone is paid appropriately for performed work?
If you’re a contractor on a Federal project, for example, you may be required to post a payment bond. A payment bond serves as a guarantee that the subcontractors and material suppliers underneath you, including second-tier companies, will be paid. In essence, this forms a contract between the owner of the project, you as the contractor, and the surety company issuing the bond to ensure everyone is paid appropriately for work performed.
To obtain a payment bond, you must be licensed and bonded with a contractor license bond in the state where the project is occurring. You’ll need to follow all state laws and regulations to operate as a licensed contractor.
Filing a payment bond claim
A contractor’s payment bond gives subcontractors and suppliers legal recourse in a situation where payment is not appropriately given. The types of claims filed against the payment bond are generally non-payment but can also include inaccurate calculation of payment. Filing a payment bond claim involves several steps which, if not followed correctly, will void your claim so be certain to know and follow the claim filing procedures accurately and timely. The surety investigates payment dispute claims by gathering information for both parties to the claim and reviewing the evidence in an impartial manner.
When a subcontractor files a claim, after it is investigated and found to be legitimate, they are paid by the surety company. Of course, this also means that the contractor is then responsible for compensating the surety company. This means you should avoid claims against your payment bonds as much as possible.
The Miller Act
If you’re working on a Federal project over $100,000, then you’ll be required by the Miller Act to post a payment and performance bond that covers 100% of the value of the contract. While the cost of the bond may vary depending on credit history, project size, and the finances of your business, the estimated premium for the payment and performance bond is generally between 1-4%. For state projects, you will also be required to obtain the appropriate bonds via a state level law similar to the Federal law, often referred to as the Little Miller Act.
Performance bonds are generally issued alongside payment bonds and are often issued in conjunction with a bid bond by one surety company. A performance bond serves as a guarantee to the performance of the job, meaning that the project work, will be completed and meet the contract specifications. Similar to the payment bond, if you file a claim against the performance bond for defective or deficient work, the claim filing procedures must be accurately followed, and the surety company investigates the claim in an impartial manner.
In the event you are unable to complete a contract
In the event you are unable to complete a contract, the surety company will bid the project out to other companies or otherwise ensure completion themselves. If you don’t complete performance and the surety company has to take over, you’ll then be responsible for re-paying the costs. Make sure you pay attention to the details of the bond so you’re familiar with the processes.
What about Private project contracts?
Private project contracts can also stipulate the use of payment bond, performance bond or both for contractors. Occasionally, a company requires only a payment bond, which is generally available at 50% of the premium for both bonds. Some states don’t allow you to file a mechanics lien on private projects where a payment bond is provided but, even if the state allows mechanics liens, your construction contract will likely require you to waive your rights to filing a mechanics lien. The rules for private payment and performance bonds will not be the same as those required by the Miller Act or the Little Miller Act. The rules will also vary depending on the surety company providing the bond, so it is vital you know the specific claims filing rules for each bond.
If you would like help understanding the terms of your payment and performance bonds, contact the team at National Lien and Bond. With over 30 years of experience in the construction industry, they can help you understand the details of the bond and handle paperwork to prevent claims.