The following is adapted from Quit Getting Stiffed.
In the construction world, filing a mechanic’s lien is a contractor’s best bet to secure their right to payment, but what do you do if you’re contracted to provide work or materials to the government? You cannot file a lien against a government-owned property, but you can still secure your right to payment in the same way as filing a lien by filing a bond claim. All governmental entities—whether city, county, or state—have governmental immunity, which means that you can’t sue them unless they say you can. The government has not given permission to be sued for unpaid contractors and/or material suppliers on their construction projects. Instead, the law requires the general contractor to have a payment bond to pay all unpaid contractors and material suppliers. This blog will give you the unbound truth about bond claims.
What is a bond?
A bond in the physical world is just a few pieces of paper. In the legal world, it is a promise by the insurance company that issued the bond to pay valid bond claimants if the general contractor does not. A bond is not insurance; if a bond company is forced to pay a claim, it will go after the general contractor that obtained the bond for repayment. To obtain a bond, the individual owners or the general contractor must sign a personal guarantee. This means if a bond company is forced to pay a claim, not only will they seek to recover the amounts paid from the general contractor that got the bond, but also from the individual owners. This is why general contractors who obtain bonds try not to give them out unless they have to.
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The basics of bonds in Texas
- We recommend getting a copy of the general contractor’s bond before you sign the subcontract. That way, you have a copy of the bond before any issues arise. The general contractor knows you are informed of your rights right off the bat.
- You need to perfect a bond claim in the same way you perfect a lien claim: by sending timely notice. To see details of your state bond notice deadlines, visit subcontractorinstitute.com.
- Once you file your bond claim, you will receive a letter from the bond company requesting your subcontract and all relevant paperwork. You must respond to this letter, or your bond claim will not be paid. It is best to draft a letter explaining how you are owed the amount you are claiming and attach all relevant documents. The bond company will use this information to determine if your claim should be paid or not.
- Just like a lien claim, you must file suit to enforce your claim, or it will expire. You must file suit against the bond company to enforce your bond claim within one year of the date you mailed your notice of claim letter. If you do not bring suit within this year, your claim against the bond company will expire and you will only have a claim against the company that hired you. Before you file suit, you must give the bond company and the general contractor sixty days to respond to your bond claim. This gives them time to evaluate your claim and determine if it should be paid before you file your lawsuit.
- In general, public works projects are slow to pay. If you are not used to public work, make sure you have the cash flow to handle working for at least three or four months without getting paid.
Want the bond rules for the other states?
To find the basic rules for bonds for the other 49 states, visit the Subcontractor Institute.
The truth about bond claims
Bond claims can be one tough nut to crack, meaning you do not have the same type of leverage with a bond claim that you have with a lien. With a lien, you have leverage with a claim against the owner, pending foreclosure of the lien. With a bond, there is no leverage. If the general contractor or company that obtained the bond does not agree that your claim should be paid, the bond company will not pay. Most bond claims end up in lawsuits to enforce the claim, which means attorney fees and a long legal battle. Price your public works jobs accordingly. If you get in a dispute with the general contractor, it will take a lot of time and attorney fees to get it resolved.
Bond claims at the Texas state level have a lot of ins and outs. Having a valid bond claim on the federal level is easier and straightforward.
A warning about public works projects
There are two really big things you need to be wary of before taking on a public works project:
- Slow pay: You’re working with the government, which means things will move at a government pace. You need to have a decent cash reserve to survive their exceptionally slow payment times.
- Get a copy of the bond beforehand: The law requires that the general contractor obtain a payment bond for federal projects, but the federal government has no duty to make sure that one is actually provided. Not only that, but the federal government also has no liability to unpaid contractors and material suppliers, even if they have funds due to the general contractor. This is why we always urge that before you sign a subcontract on a federal project, get a copy of the general contractor’s bond. That way, you know for sure that there is a bond, and you can contact the bond company directly if you are unpaid.
In Conclusion
Ensuring you can collect payment and retain a strong profit margin is essential in running a successful construction business. When bidding for a government construction job make sure you are aware of the extra steps needed to successfully collect payment for a public works project. Check out our blogs that break down the bond requirements in all 50 states in the US if you’d like to do it yourself! If you need help with filing a bond in your specific state, or to speak with a qualified construction lawyer or bond specialist about filing a bond for you, contact a construction law firm today.
For more advice on a Texas contractor’s collection and lien rights, you can find Quit Getting Stiffed on Amazon.
About Karalynn Cromeens
Author of Quit Getting Screwed: Understanding and Negotiating the Subcontract, and creator of The Subcontractor Institute, has been a licensed attorney for over seventeen years. She has spent her entire legal career in construction law, advising countless clients on how to avoid litigation. Karalynn is on a mission to educate and inform subcontractors about the importance of understanding their lien and collections rights, sparking change and leveling the playing field in the construction industry.