Construction professionals are most successful when they develop a process that addresses a group of clients’ needs and can consistently execute that process in a timely and dependable manner with all component costs having been accurately forecasted and covered by the charges to the client. No contractor includes potential legal collection costs when they submit a bid for a project.
The contractor’s methodology does not directly translate to securing payment for services rendered because the details of each project are distinct. The right to file mechanic’s lien claims is dictated by the state law in which the improved property is located. The owner and end-user for a certain construction project may provide or limit an unpaid contractor’s options to get paid.
To the degree that a general discussion is possible, this article will seek to examine the primary differences between pursuing payment through a mechanic’s lien versus seeking compensation through claims against a payment bond.
What Is a Mechanic’s Lien?
Mechanic’s lien statutes authorize certain identified categories of contractors, subcontractors, lower tier subcontractors, material suppliers, equipment lessors, architects and design professionals to record the value of their unpaid invoice for performed contract work directly against the title of the improved real property.
Who can file a mechanic’s lien claim, where that lien claim must be filed, and the date by which the lien claim must be filed are established by the law of the state in which the improved property is located. No construction contract can lawfully abridge, restrict, or prohibit a lien claimant from preemptively forfeiting this statutory right. However, the claimant can willingly reduce the maximum sum that they could lien by signing periodic lien waivers that acknowledge the dollar value of work performed pursuant to a pending payment.
Although lien laws vary significantly from state to state, one general rule is that lien claims cannot lawfully be filed against a public property. However, this general restriction does not mean that contractors and suppliers who have unpaid bills for contract work performed on a public project must file a lawsuit in order to get paid.
What Is a Payment Bond?
A contract payment bond is a three party agreement wherein 1) the surety provides a written guarantee to 2) the owner (or bond obligee) that all costs incurred for services and materials provided for the contracted construction project by 3) the contractor (or bonded principal) will be paid at no additional expense to the owner.
In the United States, payment bonds are usually required for public projects where the government or public agency owns the improved property. The Miller Act is a federal statute which requires prime contractors whose contracts are greater than $100,000.00. State legislatures have enacted similar laws (generally referred to collectively as the “Little Miller Acts”), which require contractors who perform public construction contracts over a certain dollar threshold to provide payment bonds that protect the public owner up to the value of the contract.
The Miller Act and the Little Miller Acts also require contractors on public projects to furnish performance bonds, another three party agreement under which 1) the surety provides a written guarantee to 2) the owner (or bond obligee) that 3) the contractor (or bonded principal) will perform the work set owed in the contract in exchange for the listed total payment. Payment bonds are required to ensure that subcontractors and suppliers who have contributed to the performance of the bonded principals are paid accordingly. Performance bonds are required to protect the public entity from having to pay more than the work that was agreed to be performed by the bonded principal.
What Is the Biggest Difference Between Mechanics Liens and Payment Bonds?
The rights and privileges of filing a mechanic’s lien claim are established by the laws of the state in which the improved property is located. Any contractual term that preemptively prevents a contractor, subcontractor or supplier from filing a lien claim is not legally enforceable by a reviewing court.
The terms of the payment bond document dictate who can file a cognizable claim when that claim must be filed, and any other notice requirements (for lower-tier subcontractors and material suppliers who did not directly contract with the bonded principal contractor).
The general rubric is that mechanic’s lien claims are the better option for projects located on private land, but that unpaid contractors on public projects must seek payment by asserting a claim against the surety who issued the payment bonds. There are some private projects (or quasi-private projects that include public funding) that require the prime contractor to provide payment bonds but are built on private land. In those more instances, unpaid subcontractors and suppliers should probably consider pursuing compensation through both a mechanic’s lien claim and a claim against the surety’s payment bond.
One element that payment bond claims and mechanic’s lien claims share is that claimants can assert a legal right for payment on their own without the representation of an appropriately qualified construction attorney. However, just because claimants can theoretically pursue mechanic’s lien claims and payment bond claims on their own, does not mean that they should. Based on the dollar figures that are likely involved, retaining qualified legal counsel for construction disputes on large public (or quasi-private) projects represents a worthy investment.
How do I know if the general contractor on my project was required to provide a payment bond to the owner?
You can make this determination by issuing a written request to the general contractor for a copy of the payment bond (if any) for the project. It is recommended that you make this written request at the beginning of every project because then the request is part of your standard project startup (rather than in response to any disputed invoice). It is also recommended that you make the written request to as many individuals at the general contractor whose names and email addresses you have (to preemptively refute the potential later suggestion that your request was accidentally overlooked). Keep in mind that payment bonds are issued to protect the project’s owner and there is no reason why the general contractor should restrict disclosure.
How Surety Companies Make Payment Bonds Work
The law governing the payment and performance bonds is a highly specialized legal practice in which the surety retains a host of special protections. Despite the inherent complexity of these complicated disputes, some general statements can be made.
The first is that presenting a payment bond claim to the surety may be comparatively less contentious than the response that you received when you presented your invoice to the bonded contractor for payment. This is based on the surety’s core legal obligation to protect the bond obligee from extra costs on the project. The surety uses its own in-house claims against and may hire outside legal counsel to analyze and verify the accuracy of a particular bond claim.
The second is that the surety generally retains all legal defences to which its bonded principal contractor was entitled to use. By way of example, if you are a subcontractor who presented an invoice to the prime contractor seeking payment of $100,000.00, that bond principal may have only decided to pay you $80,000.00 based on a back charge of $20,000.00 for costs incurred by the prime contractor due to your company’s omissions or is installed work. Seeking payment of the $20,000.00 from the surety through a payment claim will not be effective. The surety would still seek to back-charge you the same amount for the same reasons that had been cited by their bond principal.
Sureties provide value to the public entities to whom the payment bonds are issued because they spare the government the legal costs of defending lawsuits in litigation. These sureties do not remain profitable and in business by cutting checks to every claimant for the amount sought. Asserting a payment bond claim against a surety is generally faster than traditional litigation, but claimants should not expect to receive every dollar sought unless they are able to conclusively refute every defense asserted by the surety and the bonded principal.
Conclusion
If you have an unpaid bill for a public project on which there is a payment bond, pursuing payment through the surety’s payment bond may be your best bet. If you have an unpaid bill for a quasi-public project where public funds were used to improve private land, you should probably try to file the mechanic’s lien claim AND assert a claim against the payment bond.
If you have a complicated construction dispute, or a “bet the company” case, Lien Line recommends that you directly reach out to our recommended legal counsel in your state in order to get a better understanding of your recommended options for prevailing in your state.