Guide to Understanding Payment Bond Claims

Dealing with payment delays and disputes can be a huge headache for construction professionals. Luckily, there are various remedies available for construction participants to recover payment from delinquent clients. One of the most effective methods is making a payment bond claim. Payment bond claims are often used in projects funded by the federal, state or municipal government.

In these projects, lower-tier construction participants are allowed to make a claim against the general contractor’s payment bond if a payment dispute arises. The bond claim process is generally similar to filing a mechanic’s lien. It is important to note, though, that mechanic’s liens apply to private projects. Construction parties working on a publicly funded project, therefore, have to know their way around making a successful bond claim.

What Is a Payment Bond?

A payment bond is a surety bond that general contractors are required to furnish to a contracting government entity. The Miller Act mandates a general contractor to secure a payment bond in order to protect the payment rights of all the persons who supply labor or materials to a public construction project. The Miller Act also requires a general contractor to furnish a performance bond, which protects the project owner in case the general contractor fails to meet the contract terms. A performance bond is not the same as a payment bond.

The payment bond is, however, similar to a mechanic’s lien. Both processes protect the payment rights of a construction participant, and both remedies require lienors or bond claimants to follow specific requirements that may vary per state. However, note that while payment bonds are more commonly used in public projects, higher-tier parties in private construction projects may also secure a payment bond.

How Do Payment Bonds Work in Private Projects?

Payment bonds in both public and private projects generally work the same way: an unpaid construction participant can make a claim against the payment bond so the surety company can cover the outstanding debt. Payment bonds are mandatory in qualifying public projects, but they are optional in private projects. However, construction parties working on private projects have the option of filing a mechanic’s lien instead.

Who Can File a Payment Bond Claim?

A bond claim can be made or filed by lower-tier parties, such as subcontractors and material suppliers, working on public projects. General contractors are the ones who furnish the bond claim to the contracting entity, which implies that they are not allowed to make a claim against their own payment bond. However, general contractors are protected from nonpayment by their contract with the awarding government entity.

When Do You Make a Payment Bond Claim?

Every payment bond has a different set of terms for deadlines and requirements. However, most bond terms follow the general rules set by state laws. If the Miller Act sets the general standard for protecting the payment rights of construction parties working on public projects, there are also so-called “Little Miller Acts,” which regulate the bond claim process in each state. The table on page 22 lists some of the required deadlines for submitting a bond claim notice per state.

How Do You File a Payment Bond Claim?

The bond claim process may be broken down into four basic steps: securing a copy of the payment bond, serving the preliminary notice, submitting a bond claim notice, and enforcing a bond claim in court.

1. Secure a copy of the payment bond—A construction participant on a public project must make it a point to secure a copy of the payment bond by writing a request to the general contractor or directly asking the awarding public entity. Having access to a copy of the payment bond is important because it contains all relevant information about the project, including the name and address of the surety company as well as the specific terms of the payment bond.
   
2. Serve the required preliminary notice—Similar to a mechanics lien, a bond claim may be successfully made in certain states only if a preliminary notice has been duly served by the claimant. Note that not all states require potential bond claimants to serve a preliminary notice. Parties are required to serve a preliminary notice in California, as well as in other states like Idaho, Maine and Pennsylvania. States that have no specified preliminary notice requirements include, but are not limited to, New York, Massachusetts and Tennessee.
   
3. Serve the bond claim notice—Serving the bond claim notice is the equivalent of filing a mechanics lien. However, instead of filing it in the registrar’s office, a bond claim notice is served on the general contractor and the surety, as well as the awarding government entity. The specific rules on whom to serve the bond claim notice on vary per state, and so does the deadline by which the bond notice must be submitted (see table on page 22). Note that after serving the bond claim notice, a claimant may follow up with the surety and ask about the status of their payment claim. Following up with the surety may speed up the payment recovery process.
   
4. Enforce a bond claim—Enforcing a bond claim means initiating a legal action in court to recover payment. This only becomes necessary only when the surety fails to honor their payment obligation to the payment bond claim. Claimants must be mindful of the enforcement deadline because failing to enforce a bond claim by this date means that the bond has expired, and the surety no longer has the obligation to release payment. The deadlines for enforcing the payment bond claim may be as short as 6 months after the completion of the public construction project, as in Colorado, or may be as long as 2 years after the last day of furnishing services, as in Oregon.
   

All states follow the same general bond claim process as outlined above. The following are some state-specific examples of the bond claim process.

How Do You File a Payment Bond Claim in California?

Begin by securing a copy of the payment bond from the general contractor, then serve a preliminary notice within 20 days of your first day of work. If you miss serving the 20-day preliminary notice, you can still serve a written notice on the surety and the bond principal within 15 days after a notice of completion is recorded, or within 75 days after project completion if no formal notice of completion is filed.

If a payment issue comes up, deliver the bond claim form to the surety and the general contractor within the deadline (see table). Service must be made via certified or registered mail or via personal delivery. If payment is still unreleased, enforce the payment bond claim by initiating a lawsuit. Your firm may also consider pursuing a stop notice claim while making a payment bond claim.

How Do You File a Payment Bond Claim in Texas?

Texas has a recurring bond claim process, which means that you must post a claim for every month that you work on a project and a payment dispute comes up. There are two forms to serve: the second month notice and the third month notice, which is the bond claim itself.

The second month notice is served on the fifteenth day of the second month after each month that you work on a project, while the third month notice is served on the fifteenth day of the third month for every month that a payment dispute comes up.

Both forms are served on the surety and the general contractor via registered or certified mail. If payment is unreleased, a bond claim must be enforced within 60 days after the third month notice is served.

How Do You File a Payment Bond Claim in Florida?

Parties who have no direct contract with the general contractor must serve a preliminary notice within 45 days of their first day of work. The bond claim itself must be delivered to the surety and general contractor via personal delivery or registered mail.

The deadline for serving the Florida payment bond claim is within 90 days of your company’s last day of work. If payment is not made, a lawsuit must be initiated within one year of your last day of work to enforce your company’s Florida payment bond claim.