Payment Bond Laws and Requirements
You’ve done the work, you’ve upheld your end of the deal, and now, it’s time to get paid. But what exactly are the payment bond rules for filing a claim? Bond and surety claims law can be a complicated and dense area to understand. But don’t worry: We’re here to help break it down for you.
What Is a Payment Bond?
The first thing you need to understand is what a payment bond is and how it operates. Like other forms of construction bonds, a payment bond is a form of surety. It’s generally posted by a construction project’s prime contractor and serves as a guarantee that the subcontractors and suppliers on the particular project will be paid for all of the labor and materials they’ve provided.
A payment bond is similar to a mechanic’s lien in that it helps settle payment disputes between different parties involved in a project. Much like an insurance policy, a payment bond is a stand-in for a predetermined amount of money. When the prime contractor is either unable or unwilling to pay those below them for services rendered, subcontractors and suppliers can make a claim against the payment bond for the money they’re owed.
More often than not, the prime contractor is legally required to obtain a payment bond from a surety company before beginning construction of a public works project. The bond is usually required to meet a specific value, but this value can vary based on each state’s specific laws.
Basics of Payment Bond Laws
By far, the most important law to understand when it comes to payment bond rules is your state’s “Little Miller Act.” An extension of the federal Miller Act, a Little Miller Act dictates the requirements for obtaining construction bonds on public works projects. This includes items such as the amount required for the bond, the labor and materials it covers, the contract amount that requires a bond, and the time a bond allows for claims to be filed.
Since each state has its own Little Miller Act, the bond claim laws per state can vary widely. For example, in Alabama, a bond cannot be valued at less than 50% of the contract price. Arkansas, however, requires that the bond is equal to the amount of the contract price on any public works project worth more than $20,000.
The Miller Act also states who is and is not able to make a claim against a bond. Under this law, only subcontractors and suppliers who have direct dealings with the prime contractor are entitled to file a claim or bring about a lawsuit. A supplier of a supplier, for example, is unable to make a claim against the prime contractor.
In order for a claim to be valid, state bond claim laws require that anyone making a claim submit a notice within 90 days of the last day that labor or materials were provided to the project. It’s important to know that simply mailing the notice within those 90 days does not fulfill this requirement: The notice must actually be received in that time frame.
Additionally, another deadline you need to be aware of is a bond’s statute of limitations. This is the deadline for filing a lawsuit for not receiving payment. Under the Miller Act, those looking to file have one year from the date the last materials or labor were supplied to do so.
Frequently Asked Questions About Payment Bond Laws
Are Payment Bonds Common Law or Statutory?
Whether a payment bond is common law or statutory depends on the specific bond in question. Public works construction projects that fall under the state’s Little Miller Act are required to obtain payment bonds, making them statutory. However, with private projects or public works projects that do not meet specific state laws, payment bonds aren’t considered statutory. In these instances, if a payment bond is obtained, it is considered to fall under common law.
In Construction Law, Who Pays for a Payment/Performance Bond?
A payment or performance bond is normally paid for by the prime contractor of a project. This is because a payment bond is a guarantee from the contractor to pay the entities below them, and a performance bond is a guarantee to the project owner that the contractor will complete the job while meeting all of the agreed-upon specifications.