In all public construction projects (State, Local & Federal), in excess of certain monetary limits, the Prime Contractors (those with a direct contract with the Public entity) are required to provide Performance Bonds and Payment Bonds. The Performance Bond provides a guarantee that the Prime Contractor will perform in accordance with the Contract and if not, the Owner may look to the Surety (the entity issuing the bond) for performance. The Payment Bond protects subcontractors and material suppliers who have a direct contract with the prime contractor as well as suppliers and/or sub-subcontractors to subcontractors of the prime contractor.
In the event that you fall into one of these categories it would behoove you to obtain a copy of the Payment Bond at your earliest convenience before any payment issues arise. The bond is an important paper that contains your rights to collect payments in the event that the contractor (or subcontractor) does not make payment as agreed.
In the event that a prime contractor fails to make payments on its contract with a subcontractor or to a supplier under a purchase order, these entities may make claims on the payment bond. In order to preserve their claim, suit on the bond must generally be brought within one year after the last date that material or work was performed on the bonded project. While this is the statutory time limit, some bonds provide for a longer period.
If your company is a second tier claimant, i.e. a sub-subcontractor or a material supplier to a subcontractor of the prime contractor, in order to preserve you right to make a claim on the bond, you must provide notice within 90 days of the last material or work performed on the bonded project. The notice must generally be sent to the Owner, the prime contractor and the entity who has not paid. Again, the Bond may alter these notice provisions and should be reviewed. If the claim is not paid, again, in order to preserve the claim, suit must be brought within one year and 90 days after the last material or work was performed on the bonded project.
Once a claim is made to the bonding company, payment is not always automatic. The surety is entitled to assert the same defenses that its principal (entity for which the bond was issued) could assert had a claim be brought directly against them. For example if the claimant on the bond is a subcontractor to the prime contractor, the surety could assert a ser-off for defective work performed by the subcontract or a set off for work not completed.
The Payment bond is not the end all to receipt of payment from a recalcitrant party and a claimant who wishes to make a claim must be diligent in preserving its rights.