Many construction projects require involved parties to obtain payment and performance bonds. These bonds guarantee the completion of a project or payment to contractors, subcontractors, and materials suppliers should another party default on their obligations. If you’re embarking on a building project, a construction law attorney can draft or review the relevant bonds to protect your rights and interests.
Understanding the Difference Between Payment and Performance Bonds
Although construction projects may involve payment and performance bonds, each type of bond serves a different purpose. A payment bond ensures payment to subcontractors and suppliers by a general contractor if the general contractor fails to make payment when required under a construction subcontract. Conversely, a performance bond provides financial resources to fund the completion of a construction project should a contractor or subcontractor fail to complete their work.
Subcontractors and suppliers usually file claims under payment bonds to receive payment for their work on a construction project. A property owner or general contractor may file a claim under a performance bond to fund the completion of a subcontractor’s work or to finish the project if a general contractor defaults.
When and Why Bond Claims Arise
Subcontractors and materials suppliers usually file payment bond claims due to a general contractor’s non-payment for labor and materials on a construction project. A general contractor or project owner may file a performance bond claim for various reasons, such as:
- A contractor’s or subcontractor’s default under a construction project
- A construction company’s abandonment of a project
- Poor workmanship that requires repair or revision
Construction contracts and bond agreements usually require parties making a claim against a bond to file their claim within a certain timeframe after discovering their claim, non-payment, or completion of the contract.
Key Considerations for Filing or Defending Against a Bond Claim
There are a number of critical considerations for businesses to keep in mind when dealing with payment and performance bond claims, including:
- Claim deadlines and notice requirements, which a party must satisfy to have a valid bond claim
- The need to gather relevant documentation, including contracts, invoices, and change orders
- Communicating with the surety to ensure receipt of the bond claim
- Evaluating potential defenses against bond claims, such as improper notice or waivers of payment/performance
Best Practices for Businesses
Businesses who enter construction projects should follow best practices with respect to payment and performance bonds, such as:
- Reviewing the bond terms before signing contracts, including understanding claim deadlines and requirements for notices
- Keeping detailed project records, including invoices, expense records, and copies of correspondence
- Understanding state and federal laws that govern payment and performance bonds, including for public projects
- Consulting legal counsel to understand bond terms before entering an agreement and when a potential legal dispute arises
Contact a Construction Attorney Today
Whether you need to file a bond claim or you’ve received notice of a claim against you, you can best protect your interests by getting experienced legal help. Contact August Law, PLLC, today for an initial consultation with our legal team and find out what we can do for you.