Contract documents

May 4, 2022

If you’re a construction professional, you have probably heard the term “payment bond.” A payment bond is a three-way agreement between a principal obligor (usually a contractor or subcontractor), obligee (usually an owner or upper-tier contractor), and the surety. Generally, when a principal obligor fails to pay its subcontractors or suppliers, the payment bond requires the surety to fulfill its bonded principal’s payment obligations to these subcontractors or other persons supplying labor and materials.

In order for subcontractors and suppliers to receive the benefit from a contractor’s payment bond, they usually must file a claim for payment under the bond. But how exactly is this done? Here are 3 steps that you can follow when asserting a payment bond claim.

1.       Obtain a Copy of the Bond.

First, you should obtain a copy of the payment bond. Subcontractors and suppliers are usually permitted to request a copy of the bond from the principal obligor. In fact, some parties may be contractually required to furnish a copy of the bond upon request. For example, AIA Contract Documents requires general contractors and subcontractors to furnish a copy of the payment bond at the request of a potential beneficiary. Specifically, Section 11.1.3 of the A201- 2017 General Conditions of the Contract for Construction states:

§ 11.1.3 Upon the request of any person or entity appearing to be a potential beneficiary of bonds covering payment of obligations arising under the Contract, the Contractor shall promptly furnish a copy of the bonds or shall authorize a copy to be furnished.

If your project uses the A201, subcontractors and suppliers should make a written request to the bonded principal for a copy of the payment bond. This written request should also include a reasonable timeframe for a copy of the bond to be provided to the requesting party, such as 3 to 5 days. Be sure to retain a copy of your written requests in case you do not receive an adequate response.

2.       Understand the Terms of the Bond.

Once you have obtained a copy of the payment bond, be sure to thoroughly read through and understand it. You should consult with an attorney when doing this. Payment bonds usually contain important definitions and terms regarding action that must be taken by the claimant and the bonded principal. For example, under A312-2010 Payment Bond, “Claim” is defined as a written statement by the claimant including, at a minimum, (1) the claimant’s name, (2) the name of the claimant’s customer for whom labor was done or materials were furnished, (3) a copy of the underlying agreement or purchase order, (4) a description of the labor, materials, or equipment furnished, (5) the date of the claimant’s last performed work, (6) the total amount earned by the claimant for its work as of the date of the claim, (7) the total amount that the claimant has been paid, and (8) the total amount due and unpaid to the claimant for work as of the date of the claim. Claimants must adhere to the definition of “Claim” under the terms of the bond when submitting a payment bond claim to the surety.

Additionally, payment bonds usually contain a description of the surety’s obligations. For instance, payment bonds may detail when the surety’s obligation to make payment arises, limits on the surety’s payment obligations, and how the surety’s obligations may be paid, such as from the remaining construction contract funds.

3.       Precisely Follow the Terms of the Bond.

Finally, make sure you follow every provision set forth within the bond. Payment bonds usually contain particular instructions that claimants are required to follow in order to make a proper claim. This may include that a claim be made on a specific form, include certain information, or be sent to an individual at a specified location. You should consult with an attorney to ensure you are complying with the terms of the bond when asserting a payment bond claim.

If your project uses the A312, claimants are required to follow a particular procedure when submitting a payment bond claim. As mentioned above, claimants must comply with the definition of “Claim.” Additionally, if the claimant does not have a direct contract with the general contractor, it must provide a written notice of non-payment to the contractor, stating the amount claimed and the name of the party to whom work was performed, within 90 days after having last performed the work included in the claim. Additionally, claimants must send a claim, as defined by the bond, to the surety at the address set forth in the bond. For claimants having a direct relationship with the contractor, they are required to have sent a claim, as defined by the bond, to the surety at the address set forth in the bond. Be sure to properly document and retain copies of your compliance with the bond procedures when submitting a claim to a surety.

In all, ensuring that you make a proper bond claim is a vital step in receiving payment for unpaid work on a project from a surety under a payment bond. If you fail to follow the claims procedure or other requirements set forth in the bond, you may risk having your claim denied by the surety.

AIA Contract Documents has provided this article for general informational purposes only. The information provided is not legal opinion or legal advice and does not create an attorney-client relationship of any kind. This article is also not intended to provide guidance as to how project parties should interpret their specific contracts or resolve contract disputes, as those decisions will need to be made in consultation with legal counsel, insurance counsel, and other professionals, and based upon a multitude of factors.