Construction projects involve significant financial risk for all parties, and the failure of a contractor to complete a project or pay its subcontractors and suppliers can have cascading consequences throughout the project. Surety performance and payment bonds are the primary financial mechanism the construction industry uses to manage that risk, but understanding how they work, who can claim against them, and what the claims process involves is essential for owners, contractors, and subcontractors alike.
The construction law attorneys at Mandelbaum Barrett PC advise project owners, general contractors, subcontractors, and sureties on bond claims, coverage disputes, and contractor default situations across New Jersey and New York. Here is what parties to a bonded construction project need to know.
What Performance Bonds Do
A performance bond is a three-party agreement involving the project owner (the obligee), the contractor (the principal), and the surety company. The surety guarantees that the contractor will complete the project according to the terms of the underlying construction contract. If the contractor defaults, the surety is obligated to step in, either by completing the work through a replacement contractor, providing funds to the owner to hire a replacement, or paying the owner the cost of completion up to the bond penal sum.
A performance bond is not insurance for the contractor. It protects the owner against contractor default, and the surety has the right to pursue the contractor to recover any amounts paid under the bond claim.
What Payment Bonds Do
Payment bonds protect subcontractors, suppliers, and laborers who have provided labor or materials to a bonded project. Unlike a mechanic’s lien, which attaches to the real property, a payment bond claim runs against the surety itself. On public projects in New Jersey and New York, payment bonds are typically required by statute. On private projects, the use of payment bonds is voluntary but common on larger or more complex projects.
According to the U.S. Department of the Treasury Bureau of the Fiscal Service, federal public projects over the applicable threshold require both performance and payment bonds under the Miller Act. State public projects in New Jersey follow the Little Miller Act, which imposes similar requirements for state-funded construction contracts.
Making a Bond Claim
The process for making a performance or payment bond claim varies by bond form and applicable statute. Notice requirements are critical: failure to provide timely notice as required by the bond or applicable law can bar a claim entirely, even if the underlying default or non-payment is not disputed.
Key procedural steps typically include:
- Reviewing the bond document for notice requirements and claim deadlines
- Providing written notice to the surety within required timeframes
- Submitting documentation of the claim, including unpaid invoices, project records, and the underlying contract
- Cooperating with the surety’s investigation of the claim
The surety’s investigation period creates a window for negotiation, and experienced legal counsel can help claimants present the most complete and compelling record of their claim during this phase.
Disputes Between Sureties and Claimants
Sureties may dispute the amount, validity, or timeliness of a claim. These disputes can require litigation, which introduces additional complexity because the surety’s obligations are defined by both the bond and the underlying construction contract. Claimants who have a thorough record of the project, the default, and the loss they sustained are better positioned to resolve disputed claims efficiently.
Contact Mandelbaum Barrett PC for Construction Law Guidance
Whether you are asserting a bond claim, defending against one, or advising on bonding requirements for an upcoming project, the construction law team at Mandelbaum Barrett PC is here to help. We work with all parties to bonded construction projects throughout New Jersey and New York.
Reach out through our contact page to speak with our construction law team. We are available to help you understand your rights and obligations under a performance or payment bond.