Magazine article Business Credit

Securing Payment through Payment Bonds

Magazine article Business Credit

Securing Payment through Payment Bonds

Article excerpt

For construction projects owned by federal, state or local governmental entities, contractors and suppliers can't use mechanics liens to secure payment on the job.

Instead, the federal Miller Act and state Little Miller acts require a party to the projects contract-typically a general contractor-to provide a payment bond to secure payment to all subcontractors and suppliers, according to NACMs Construction Law Survival Manual, by James Fullerton, Esq., of Fullerton & Knowles PC, in Clifton, VA. Chris Ring, of NACMs Secured Transaction Services (STS), offered guidance to suppliers and others on how to better understand payment bonds in a recent STS webinar.

Note that it is crucial for construction creditors to obtain and review a copy of the payment bond to understand the specific requirements for giving notice, the type of notice, the documentation to be presented and other time limitations. Little Miller Act bonds may parallel the federal Miller Act or significant differences may exist.

The two principal questions regarding who may make a claim for Miller Act payment bonds are whether the claimant supplied a type of labor or material that is covered, and whether the claimant is too remote contractually from the bond principal, the Manual states.

Federal courts have generally decided that payment bonds cover first-tier claimants (those with a contractual relationship with the prime contractor) or second-tier claimants (those supplying labor or materials to a subcontractor). The Manual states that suppliers to suppliers, then, will not usually have payment bond rights.

On a private project, the owner may also benefit by providing subcontractors and suppliers a bond as a substitute to mechanics' liens, or in most states, the owner has the option to bondoff a lien if later filed, according to STS's Lien Navigator. If the principal fails to pay the subcontractors or suppliers, they may collect from the principal or surety under the payment bond, up to the penal sum of the bond.

Public-private partnerships (P3s) raise concerns for subcontractors and suppliers regarding payment assurances, according to STS. The "blending" of private and public financing and ownership of construction and real estate poses unique risks for subcontractors and suppliers, who cannot file mechanic's liens on projects where the federal government owns the land. …

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