As an architect, engineer, or other design professional, you may be called upon to assist the owner when a bond claim has been made, and a new contractor is being brought in to take over the project. Therefore, it is important to understand how the surety handles bond claims and the bonding process, in general.
With that in mind, today we have a guest post on the ins and outs of bond claims in North Carolina from a surety bond expert– founder and president of Lance Surety Bond Associates, Vic Lance. Vic is a graduate of Villanova University with a degree in Business Administration and holds an MBA from the University of Michigan’s Ross School of Business.
Take it away, Vic…!
As construction specialists in North Carolina are well aware, contract bonds are an indispensable requirement for bidding on public and private projects all across the U.S. Unfortunately, even the most diligent contractors can get into trouble with construction bond claims. Claims are typically filed when project owners are not satisfied with the quality of the executed work, or if the contractor defaults or breaches contractual obligations.
While avoiding surety bond claims is the best option, sometimes claims are inevitable. Let’s take a look at the basics about surety bond claims and the specificities that North Carolina construction professionals should keep in mind.
The way contract bonds work
Construction contract bonds, including bid bonds, payment bonds and performance bonds, are often a requirement for bidding on public and private projects. Similarly to other surety bonds, they are a three-party agreement between the contractor who needs the bonding, the entity requiring the bond (usually the project owner) and the surety that underwrites the bond. Contractors cover a percentage of the bond amount, which is their actual bond cost, in order to get the backing.
For example, Federal construction projects above $100,000, as well as the majority state and local ones, require contractors to obtain both payment bonds and performance bonds. As for private projects such as commercial and residential buildings, project owners also prefer to include the bond requirement for bidders.
Payment bonds serve an important function in safeguarding subcontractors and suppliers. They guarantee that the main contractor will make all due payments on labor and materials. Performance bonds, on the other hand, directly protect project owners by allowing them to use the safety net of the bonds to hire another contractor to complete the work on time and with good quality.
The basics about surety bond claims
There are different situations that can trigger a bond claim, but the most common ones include (1) defaults, (2) breaches of contractual agreements, and (3) non-payment to subcontractors or suppliers. Naturally, disputes can also occur that might not be directly linked to the actions of the contractor.
For North Carolina construction professionals, the most important thing to remember is that your surety is your best partner in such situations. It can provide legal and logistical help at all stages of the claim process. It’s up to the surety to carefully consider all facts about the case and to assess whether it stands a solid ground.
The typical resolution is to seek a settlement between the claimant and the contractor. Often this is the least problematic way to tackle the case, and sureties help their bonded clients in going through this process. As for the completion of the work, in the case of a performance bond claim, the surety either selects a contractor to finalize the project, or the project owner organizes a tender to choose a new contractor. [Editor’s note: This is often also the time when the surety requests architect/engineer assistance in evaluating the project status and bringing a new contractor up to speed.] For any compensation that the surety has given to affected parties, the contractor is fully responsible to reimburse it.
How construction bond claims are handled in North Carolina
While bond claims are generally handled in similar ways across the U.S., there are some specificities that North Carolina contractors should keep in mind. The legal basis for claims in the state are the Federal Miller Act, as well as the North Carolina Model Payment and Performance Bond Act. They set the rules for handling payment and performance bonds on public projects, but are not applicable to private ones.
These acts set the timeframe and notices requirements for payment bonds on public projects, but not for performance bonds on such projects. That’s why handling performance bond claims on both public and private projects is done via the language of the bond, the contract in question and the general legislation.
It’s important to note that on state projects, the bond protection covers only prime contractors, and the rules do not apply to subcontractors. The requirement for posting bonds in North Carolina public projects is for those projects above $300,000. As for payment claims, the North Carolina Act sets a 120-day notice requirement for subcontractors and suppliers to assert a claim against a contractor. Further details about the specifics can be found in the Surety’s Defenses to Construction Contract Termination document (pdf).
While surety bond claims are unpleasant for all parties involved, they are sometimes a fact in the construction industry. However, knowing the legal background is important for contractors, so that such cases can be minimized and solved in the best possible way.
What is your experience with construction bond claims? Please share your insights in the comments below.