A payment bond is a surety bond posted by a contractor to guaranty that his subcontractors and material suppliers on the project will be paid. They are required in contracts over $30,000 with the Federal Government and must be 100% of the contract value. They are often required in conjunction with performance bonds.
Independent of mechanic's lien rights, subcontractors and suppliers should be conscious of the possibility of a payment bond existing. The larger the job the more likely a payment bond exists. Also note, nearly all public jobs require payment bonds. A typical payment bond requires suppliers (but not subcontractors in direct contract with the prime contractor) to provide written notice, sent by certified mail, return receipt requested, to all parties "upstream" within ninety days of last supplying materials to the subject project. Bond terms vary, but ninety days is typical.
The payment bond claim should include the name of the project, the contractual relationships (i.e., owner, general contractor and subcontractor, etc.), and the amount owed.
A payment bond claim can be made even if the name of the surety is not known. All that is required is that written notice be sent certified mail, return receipt requested within the appropriate period of time to the owner and contractor (i.e., the principal on the bond). Some bonds excuse the written notice requirement if the bond claimant has a direct contract with the principal on the bond. Unless the bond terms are known, it is best to send the written notice to all interested parties.
Bonds typically have two time limits. First, a written notice requirement such as the one detailed above acts a condition precedent to a bond claim. And second, a period of limitations requirement usually exists which requires that any lawsuit on the bond be commenced within a certain period of time. The typical time limitation to commence a lawsuit is one year from the last day worked or the last day materials are supplied to a particular project.
A supplier's payment bond claim is enforceable against the bonding company regardless of whether or not the general contractor (the principal on the bond) has paid its subcontractor in full. Thus, the inherent limitation on the enforceability of liens (i.e., derivative rights) is not an obstacle to the enforcement of a payment bond claim.
Accordingly, a payment bond claim is of greater value than a lien because it provides greater security for payment if it can be proven that work was performed or deliveries of materials occurred.
Note: In the case of either a mechanic's lien or a payment bond claim, it is critical to prove that moneys are due under a contract, etc. For suppliers, proof that materials were actually delivered to a particular job is needed. Accordingly, approved requisitions for payment, signed delivery tickets showing the name of the project, etc., are important proof of the amount due. Suppliers, if possible, should avoid shipments to a customer's warehouse, as lien and bond rights may be limited in such a case.