Understanding the Construction Bond Claims Process in North Carolina (guest post)

craneAs 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.

signingThe 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.

Surety Bond Now a Valid Performance Guarantee for NC Developers (guest post)


Welcome summer days!  Today we have a guest post by Todd Bryant, president and founder of Bryant Surety Bonds. He is a surety bonds expert with years of experience in helping contractors get bonded and start their business.  While design professionals generally don’t have to deal with performance bonds directly, they are often at the front lines of advising owners as to various Requests for Proposals submitted by hopeful contractors.  In that spirit, be sure to read how the new law changes security requirements.

 Take it away, Todd!

Last year wrapped up with some good news for North Carolina subdivision developers: House Bill 721 confirmed that construction bonds are, in fact, a viable form of performance guarantee. Previous legislation was ambiguous on this point, but the new bill– which took effect last October– sought to clear up the confusion.  Although the new rules have been in effect for eight months, there’s been scant coverage of the changes, and what they mean for developers.

City Ordinances for Subdivisions

HB 721 is a revision to a section of North Carolina General Statutes, which authorizes cities to regulate land development with their own subdivision control ordinances. Ordinances are meant to ensure that land is developed in an organized fashion, to avoid overcrowding and congestion.

Cities have the discretion to set their own requirements for developers. Usually, cities ask developers to include certain features in new subdivisions, to fit in the city’s infrastructure. These might include recreational space for residents of the development, or building easements for existing roads and utilities. Some cities will allow developers to furnish funds for these public improvements, instead of building them themselves. Often, ordinances ask for detailed, up-to-date plans throughout project construction, so any changes can be approved by the city in advance.

To prove that they will follow local ordinances, subdivision developers must usually furnish the city with some kind of performance guarantee. According to the new bill, a surety bond officially meets the criteria for this guarantee.

The Facts on Surety Bonds

If you’re a design professional or developer in North Carolina, you’re probably familiar with these bonds already. Construction bonds, also known as contract bonds, are usually required of contractors who take on public construction projects. More and more, large private projects are requiring these bonds as well. There are a few different types of contract bonds, including bid bonds, payment bonds, and performance bonds, but they all serve a similar function. Contract bonds work like a line of credit for the developer, to ensure the project is completed on time, and according to the stipulations of the contract.

North Carolina HB 721 relates primarily to performance bonds, which are the type of contract bonds that cities will most often require from subdivision developers. With this new law, construction bonds are officially recognized as a valid form of performance guarantee that North Carolina subdivision developers can submit to demonstrate that they will follow all city ordinances.

HB 721 also includes some guidelines about how big this surety bond must be. Although cities will have the authority to set the bond amount on a case-by-case basis, it can’t exceed 125% of the estimated project cost.

Of course, surety bonds aren’t the only kind of performance guarantee that’s acceptable. Developers will still have the option to submit a letter of credit instead, or some equivalent security. However, the amount of credit that’s needed to satisfy this requirement is usually out of reach of some smaller developers.

Posting a bond requires much less capital than submitting a letter of credit, since the bond cost is only a small percentage of the total bond amount. The clarifications in HB 721 could be a boon for North Carolina developers who want to grow their business, as it could enable them to take on bigger projects. City officials in North Carolina are pleased with the new law, as well, as they believe this will make compliance and accountability easier, for government officials and subdivision developers.

If you’re a developer with questions about local ordinances, make sure to check with zoning officials in your subdivision’s city or county.

Thanks Todd for your article!  Readers, if you have questions or comments about how HB 721 affects your projects, feel free to share in the comments.

 Image source: https://flic.kr/p/9KpZH