Construction Payment and Performance Bonds

Mr. McMillan has experience in assisting project Owners to ensure that the terms contained in a Construction Performance Bond are enforced and that the project is completed in accordance with the contract.

Performance Bonds

A Performance Bond is a bond used to insure that a contractor will complete construction work in accordance with the contract.

Only the Obligee (usually the Owner) can make a valid claim against a performance bond (absent some kind of evidence showing that the bond was intended to benefit third parties, like sub-contractors).

A surety’s liability on a Performance Bond is generally limited to the face value of the bond itself (which is usually the total contract price, not including change orders).

A surety is not generally liable on a performance bond until there has first been a default. However, even one single default will suffice.

Most Performance Bonds also require certain pre-conditions including that:

  1. The Owner must first terminate the contract.
  2. Written notice of a claim on a bond must be given - usually within 30 to 90 days.

It is important to note that liability will be present only where the Owner has not also breached the contract.

Also, the Owner must lessen (or mitigate) his/her damages (i.e. for instance by protecting the work from bad weather and/or taking immediate action - so that delay damages are prevented.)

If a default does occur, a surety usually has three options:

  1. You can pay the amount set in the bond as a penalty (or can settle that amount with the owner).
  2. Finish the project - either himself or by hiring a replacement (often a surety will first seek the release from liability of the Owner prior to bringing on a new contractor); and
  3. Provide money to the principle to finish the project itself.
Payment Bonds

Mr. McMillan also has significant experience ensuring that Owners are protected with respect to Payment Bonds and that subcontractors, laborers and materialmen are protected from delinquent contractors.

Unlike a construction Performance Bond, which usually guarantees that construction work will be completed as per the terms of the contract, a construction Payment Bond is meant to protect an owner against claims made by unpaid laborers, suppliers and material men and all others who provided services in furtherance of the completion of the project (i.e. those who supplied fuel, or rental equipment for the project).

A Payment Bond is issued in the Owner’s Name. However, sub-contractors, laborers, and materialman can sue directly on the bond as interested third party beneficiaries.

Payment Bonds are filed in the County Clerk’s Office in the County where the work occurred, usually within 30 days of signing.

For public (New York State or Federal) projects Payment Bonds are required. Sub-contractors may then file a lien upon the monies of the State or Public corporation or entity.

When a claim is made on a payment bond, interest is calculated from the date of the demand.

Notice must be given if there is no direct contract with the contractor (usually within 90 days).

The Miller Act (and the related little Miller Act under New York State Finance Law §137) - Because a lien cannot attach to a Federal or New York State project, these acts allow a sub-contractor the right to claim on the bond for the amount of the balance. These are actions directly on the bond.