What you need to know about payment bond claims
While performance bonds ensure a job gets completed, payment bonds guarantee that subcontractors and suppliers get paid for their services and materials. This week, we’re covering everything you need to know about filing a payment bond claim: when to do it, what information to include, and what happens once the claim is filed.
Topics we cover in this episode include:
- When are payment bonds required?
- When should you file a payment bond claim?
- What information to provide when filing a payment bond claim
- Why contractors should take payment bond claims seriously
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Rob Williams, Profit Strategist | IronGateESS.com
Wade Carpenter, CPA, CGMA | CarpenterCPAs.com
Stephen Brown, Bonding Expert | McWins.com
[00:00:00] Rob Williams: Welcome to the Contractor Success Forum. Today we’re discussing what you need to know about payment bond claims on the Contractor Success Forum. Here with my own bonding agent from my bonding days, Stephen Brown with McDaniel-Whitley bonding and insurance agency. And Wade Carpenter with Carpenter and Company, CPAs. And I am Rob Williams with IronGate Entrepreneurial Support Systems. What do we need to know about this and the payment bond claims? Luckily, I have not really been down this road.
[00:00:42] Wade Carpenter: Can I start with just asking, what is a payment bond?
[00:00:46] Stephen Brown: Payment bond goes with a performance bond. Two go together, like Pete and Repeat. Payment bond comes with performance bonds. So any government or municipal project that you’re working as a subcontractor, for someone doing work on those type of projects, then the project had to be bonded. So if it was bonded and there’s a payment bond on the job, does that help you? Yeah, it helps you because you can file a payment bond claim.
[00:01:16] Rob Williams: So who is you? Who are we speaking to here? Not the owner of the project. This is, we’re talking about for the contractors to get paid? Is–
[00:01:23] Stephen Brown: This– no, this is for a subcontractor to get paid on a job that’s bonded.
It’s not just subcontractors that can file payment bond claims, but also material suppliers. So if it’s goes to a job and it’s tied to a job and it’s contracted as part of a job and you’re not paid for it, and the job is bonded, then you can file a payment bond claim with the surety company that wrote the bond for the project.
[00:01:51] Rob Williams: Now, can a contractor assume that all these bonded jobs have a payment bond on them, or is it just a performance bond? Do they come together on all jobs?
[00:02:03] Stephen Brown: They need to contact the owner directly if they don’t know. And say, hey, I’m having trouble getting paid. I need to file a payment bond claim. Do you have a bond on this project? And if so, what’s the name of the surety company that wrote it and what’s the bond number so I can file a bond claim?
[00:02:22] Rob Williams: So how does that come in to account with liens on the job? Because I think, is there like a lien release sometimes that you sign, so you can’t do that because it’s bonded? Or I know that’s been complicated on some jobs that I was involved in.
[00:02:37] Stephen Brown: Well, if it’s a final payment you’re not getting and you’re not working on the job anymore, then you have to give the bonding company the date you stopped work. And they pay you what’s owed up to that date. And of course, if the bonding company pays, you have to give them a lien release that you’ve paid all of your subcontractors and suppliers. So, that’s the way that works.
It’s just not complicated. It’s pretty routine. And you might say, Well, how do I know the job’s bonded? Well, if it’s a job for your city, or your state, or the federal government, it’s required by law to have a bond if the project’s over a hundred thousand dollars. And also it’s public information, so it’s no problem getting a copy of the bond.
You might say, well, I’m gonna really burn my bridges with the general contractor, say, that I’m filing this payment bond against. And that may or may not be true. You may not care. But if you’re not getting paid, you’re not getting paid. And it’s just a way to get paid.
A lot of times material suppliers will me to get the information on the bond before they sell materials to that contractor. It’s just what they do as part of their business to put their file together. If they don’t pay, then we’ve got a payment bond backing up payment for these materials. So, we wanna know that information before we give you the materials. So they do that.
It’s also a subtle message to the contractor of saying, we will go after your bond if you don’t pay.
When are payment bonds required?
[00:04:13] Wade Carpenter: Can we back up just for a little bit? Because I know we were defining what a payment bond is. What circumstances do we need them? Is it pretty much forced on them by the owner or? I know you mentioned like federal and municipal stuff, so can you talk in general about when we need them and when they’re required?
[00:04:31] Stephen Brown: Sure. They’re required by state law, they’re called Little Miller Acts. And then there’s a big federal government law called The Miller Act that requires bonding. And on a construction project, that bonding consists of a performance and payment bond. So the payment bond protects, you know, government entities can’t be sued for payment claims. They’re government entities. So that’s why they require these payment bonds. So if you’re a subcontractor that’s not getting paid on one of their projects, you have some recourse to get paid because you can’t file liens on federal projects.
[00:05:14] Rob Williams: Oh, there. That was my question. You just answered the question right there. That was a very key point.
[00:05:21] Stephen Brown: Well, there’s also private work that bonds are required. And that private work, you have to have a release of lien after the surety company pays you for your payment that’s due.
[00:05:33] Wade Carpenter: Well, that’s where I was gonna go with it. Can you just talk for our listeners’ sake? How many of these general contractors are getting payment bonds when they’re not forced to? How often do we see them?
[00:05:44] Stephen Brown: Well, some the owner requires. And usually the owner requires it to protect their own assets. Or the lending institution who’s financing the project requires it, the owner, to get the bond. And the financing institution may be named on that bond as well as a co-obligee. So that’s where private work bonding comes into play.
[00:06:08] Rob Williams: I’m wondering how early we see this. I don’t know that I paid attention to that when I was bidding jobs, but I guess that information is probably even available at the time when you’re looking at jobs and those, I know we used to go to the Builders Exchange and stuff when we were getting those jobs. I bet that information was available there, or…
[00:06:28] Stephen Brown: It is, and you can almost always, if it’s a public job at least, pull up the information of who the contact person for the owner is. So remember, there’s three parties to a bond. There’s the principle, that’s the contractor that’s required to give the bond. There’s the obligee, that’s the owner. That’s the person who wants the, for example, the building built.
Then there’s a surety company. So the surety company’s guaranteeing the performance and the payment of this work. And they’re guaranteeing that, for example, a general contractor doing a project is gonna complete the job according to the contract and also pay all their materials and suppliers. So, and then there’s a year warranty on their workmanship built into the bond.
So it’s real security for someone who jumps in bed with someone on a large project and needs some additional comfort.
When do you file a payment bond claim?
[00:07:27] Rob Williams: So, so talk a little bit about the process. When do you go from turning in those draws or invoicing to the contractor and then you don’t get paid. You know, at what point you might send some collection letter or something like that, Whatever your procedure is.
Or maybe it’s not even approved. I know I got into that situation where they weren’t renting these houses on a navy base one time I was building. And so they just, they didn’t have to pay the last draw until the houses were complete. So they just never finished the houses. They weren’t renting, so they didn’t put the carpets in and the finishing things for a year.
And so technically they didn’t have to pay me there for a year. That really strung me out. But you know, when are you ready to go to that versus whatever else is involved in the trickery that sometimes we get involved in.
[00:08:20] Stephen Brown: Well, it’s a good question. When do you get involved? Usually you’re filing a payment bond claim when you’ve just had it. You really think there’s a slim chance of you getting paid. You file payment claims when there’s paid as paid provisions in a contract and that general contractor hasn’t been paid yet and you agreed to it, then you’re just wasting your time and ticking off a lot of people. So you do it when you really don’t think you’re gonna collect it. Or you think that you’re being jerked around.
What you wanna do is you wanna get in on filing that payment bond claim before the job goes into total bond claim. In other words that contractor you were working for just becomes insolvent, disappears. Stops doing business, stops answering phone calls, stops paying you. That’s when you file a payment bond claim.
What information to provide when filing a bond claim
[00:09:17] Stephen Brown: And listeners, we’re gonna have a link with a copy of a letter that you send to the surety company in order to file a bond claim. It’s just that simple. It’s a letter.
[00:09:27] Rob Williams: They’ll be able to find that on Contractor Success Forum dot com.
[00:09:31] Stephen Brown: Well, there you go. And the letter, it’s important for the listeners to know what the surety company needs to know. They wanna know the bond number. You get that from the owner. Your bond agent, or you can go online or you can contact me. I’ll help you the claims department or where you need to send that payment letter to. But it talks about the project when you started, when you stopped working on the project. What you did, what they owe you for, what’s been paid, what hasn’t been paid. You list that out in the letter and you put them on notice that I am filing a payment bond claim.
And that doesn’t mean that the bonding company just writes you a check and zaps some money into your account. They have to go back to the contractor and say, we got what appears to be a very legitimate payment bond claim, and you have to tell us why this isn’t accurate, or if the numbers are off or you didn’t contract with this person.
Why contractors should take payment bond claims seriously
[00:10:33] Stephen Brown: So if you’re a contractor that has a payment bond claim filed against them, my advice is, deal with it quickly. Don’t sit around and just say, oh, forget them. They’re a pain, because remember guys, if you’re a contractor and you have a payment bond claim, and you don’t pay it and you owe it, that’s the same as having any kind of bond claim. That’s the same as not finishing a project.
So you’re dead in the water for getting bonds in the future. And if bonding is important to you, get serious about these. And your bonding agent will help you with this. So they will go back to the contractor and say, this is what we received. If you have any arguments, let us know within 30 days. And they cannot take, by law, years and years to address your bond claim. That’s what’s called bad faith. So if you filed a payment bond claim against another contractor, they have to respond. And if for some reason they don’t, that’s where you need to talk to your attorney.
What affects the cost and ability to get a payment bond?
[00:11:39] Wade Carpenter: I got a loaded question for you, Stephen. How much do these things cost and what affects your ability to get one? What things affect costs? Are they similar to getting a performance bond? Are they looking at your working capital and the overall health and strength of the company? What are we looking at here?
[00:11:58] Stephen Brown: Well, no bonding companies write a payment bond without a performance bond. That’s a separate type of financial guarantee instrument. So the payment bond that I’m referring to, Wade, is the payment bond that comes with the performance bond. They’re two separate bond forms, but they’re one deal. They are glued together at the hip.
So if I’m an owner and I’m gonna bond a project, that means I’m gonna require the contractor I choose to do the work to provide a performance and payment bond. That’s what that means. So once that’s done, there’s no additional charge. The payment bonds are included with the cost of the performance bond. And the cost for bonding a project that you can go over with your bond agent. You plug it into your bid before you bid the project.
So the payment bond is just something to protect the public. It was literally invented by the federal government. Back at the turn of the century, there were all kinds of contractors getting jobs, billing, collecting money, and never paying anybody. No suppliers, no subs– no, no, I’m just not paying you. So, all the suppliers and subcontractors were saying, we’re not gonna do government work. We’re just not gonna do it. Forget it. And they said, well, we, we got to have government construction going on. We’ve gotta have our military bases and our infrastructure. So they came up with the performance and payment bond.
[00:13:29] Rob Williams: And you know how I know this and I understand what you’re telling me, because I read your book!
[00:13:34] Stephen Brown: Ah.
[00:13:35] Rob Williams: What’s the name of your book?
[00:13:37] Stephen Brown: Contractors Bonding Playbook.
[00:13:39] Rob Williams: Yeah. It was so interesting because a lot of these things that we talk about, didn’t have a logical flow to me. It’s just, it’s like a fact. But after I read that, it’s like I, I saw that history of where these laws and why they were in place, and then a lot of this stuff made sense to me. Then I could remember it.
[00:13:57] Stephen Brown: Well thank you.
[00:13:58] Rob Williams: So that was, that was a really good background to have on that. It was actually really interesting to me. I don’t know if that means I’m a nerd for wanting to know these things.
[00:14:06] Stephen Brown: Well, you and Wade are both business book nerds. There’s no doubt about that. Both of y’all read more business books than I can conceive of, and you know all the authors and everything that they, they said that was important. And listeners, that’s what you get from listening to Contractor Success Forum.
You get these kind of geeks doing this grunt work for you.
[00:14:28] Rob Williams: The Geek Squad, The Contractor Geek Squad. We, I don’t guess we’ll rename it, but, but you know, that would be effective, effective name. So.
[00:14:37] Wade Carpenter: I’m not sure about that, but.
[00:14:39] Rob Williams: So one of the things, the new contractors that may be listening to this that are trying to get in here, or even some crazy things happen a lot of times when the back office gets involved in these things.
And so the payment bond claim is not something that your back office has as a procedure. At day 31, when that invoice is overdue, it’s okay. Send contractor payment bond claim in. That’s not the way it works, is it?
[00:15:04] Stephen Brown: You’ll make a lot of enemies doing that.
[00:15:06] Rob Williams: Yeah. We talked about it a little bit, when do you actually get to these things? Because I have gotten to the things where I’ve even, you know, talked to some of the banks of contractors or something like that. It’s just who do I know I’ve had these conversations. I have not filed a payment bond claim before, but I have maybe talked to the owner of a project or talked to a bank that’s coming and when it just got ridiculous when it’s months and months out. Or when I really needed that money, but, you know, where do you go? I don’t think I even realized that I could file a payment bond claim or maybe I would’ve done that. I just went to the resources I knew.
[00:15:41] Stephen Brown: Well, if you tell the contractor, I’m gonna have to file a payment bond claim on you, and they still don’t respond, you’ve done everything above board. And it’s not like they can pull that bond away from you. Or start scheming how to make sure you’re not paid. If you’re legitimately paid and you have the documents and you can show that you’ve done the work or provided the materials, you’ll get paid by the bonding company. If the contractor’s smart and they’re not going out of business, they will pay you so there won’t be a bond claim.
[00:16:13] Rob Williams: Yeah. Yeah, because I definitely did feel like when I got to that point to where I went to the lender, some things like that, that I was prepared to burn the bridge. I don’t know that I actually did burn the bridge, but I was prepared to say, I felt like, okay, as soon as I do this, I will never be doing work for this contractor again. I was prepared to do that, but it, it had gotten to that point.
[00:16:36] Stephen Brown: Before you file a payment claim, folks, read your contract. Refresh your memory as to what you agreed to.
[00:16:44] Rob Williams: Yeah.
[00:16:45] Stephen Brown: Take the emotion out of it and then just do it.
[00:16:48] Rob Williams: Mm-hmm.
[00:16:49] Stephen Brown: If you have to do it, that’s what bonds are for. If there weren’t bond claims, we wouldn’t be in business. I’m not encouraging everyone to do it as a business practice, but it’s there.
[00:16:59] Rob Williams: Yeah. And making sure, I think on a lot of these things when we were trying to collect, there’d be superintendent that would say somewhere, you know, well he, he never finished his punch list or just something crazy. Or, we had an episode before where we had a different contractor on here where a guy had a superintendent had lied about some stuff that the guy had not done. So all this stuff can come up where they can create the reasons. I wasn’t prepared for a lot of the things when I was trying to collect from people, they can really come up with a lot of crazy stuff that’s not true, that are lies. They can fabricate things. It gets messy.
[00:17:34] Stephen Brown: Unbelievable.
[00:17:35] Wade Carpenter: Yeah, that’s where I was gonna go with it. So just continuing the story like, somebody files a bond payment claim, and who’s making the determination whether this is a legitimate claim? Is it like the insurance company or does it end up going to mediation, or?
[00:17:52] Stephen Brown: It’s the insurance surety company. It’s the surety company that wrote the bond. They have agreed to the owner that if folks come to us claiming that they weren’t paid for materials or they’re subcontracting work, it’s covered under your bond. So that’s what the payment bond’s all about.
Tell you what else I’ll do is I’ll put a copy of a standard payment bond form along with that letter at our website. How’s that?
[00:18:19] Wade Carpenter: That’d be great. And so, if somebody actually has a claim filed against them, does that affect their ability or their rates in the future?
[00:18:28] Stephen Brown: If the surety ends up paying that claim because you’re not cooperating, yeah. You’re not gonna get bonds in the future. You’re just not. And you’re gonna say, how are they gonna know? Well, you’re rolling the dice. I can tell you that. When you file a bond claim and you don’t cooperate with the surety company, then why should they cooperate with you in the future?
And that’s my advice. Just don’t, don’t just say, Well, I’m busy. You wanna handle this crazy subcontractor, you do it. Because they might just turn around and pay it. And then you’re screwed for bonds.
[00:19:05] Rob Williams: Hm. Yeah.
Keep your house in order. It’s a good thing if you wanna do these things. It’s crazy. I can, I remember another story where they started following us around with cameras all day long to see whether anybody got too close to the edge and they created and they said, oh, well they weren’t OSHA safety, you know. And then, then we saw the other crews that, they weren’t anywhere close to as OSHA compliant as we are. They can come up with the craziest things. Keep your house in order everywhere for reasons not to pay and, and, and do things. It’s amazing what can happen out there for–
[00:19:40] Stephen Brown: I, I believe we had a podcast on putting your project files in order.
[00:19:44] Rob Williams: Yeah. Yeah. So there, there are a lot of reasons to do this. Keeping everything in order and listening to the Contractor Success Forum and all the advice that we get from our experts, guests, and hosts that we have here. It’s a crazy world of collections. Every now and then.
[00:20:00] Stephen Brown: It is.
[00:20:01] Rob Williams: So, well, great. This has, this has been very helpful and, and that helped clear it up for me kinda where the priorities of this. And luckily I hadn’t had to do that before, but maybe I should have actually, when I think on a couple of jobs, maybe I should have filed that, that payment bond claim. All right. Wade, you got anything else?
[00:20:20] Wade Carpenter: No, I, I hope we kinda hit the basics. I think there’s still a lot of contractors out there that have never been bonded and subjects like this I think are great to at least start the conversation. And my advice to you is if you’re looking to get bonded and you’re intimidated, Stephen’s an approachable guy, just talk to him. He’d be glad to talk to you about, what it takes to get bonded. And don’t be intimidated. Just pick up the phone and give him a call.
[00:20:48] Stephen Brown: Sure. Happy to talk to you. Happy to help.
[00:20:51] Rob Williams: All right. Well, thanks again everybody for listening to the Contractor Success Forum with Stephen Brown, Wade Carpenter, and Rob Williams here and Contractor Success Forum dot com. Ask us your questions that you have and give us ideas and feedback and wonderful responses to what you think about the Contractor Success Forum.
And we’ll see you on the next episode.