How to Get the Bonding Company to Pay - Georgia Webinar

In this blog, presented by SunRay Construction Solutions and Mark Cobb, Attorney, Cobb Law Group, construction professionals in Georgia can learn in detail about payment bonds, how they work, what are the key requirements to be fulfilled and how to ensure that the bonding company makes the payment successfully.

What is a Payment Bond?

Let’s begin with the basics, which is what is a payment bond? It is very important to know the basics or else it can be difficult when you find yourself in a situation where you have to make a payment bond claim. So, a payment bond is a type of surety bond that guarantees that the general contractor will pay the people who are below him in the construction project chain.

The payment bond is a good recourse because the owner doesn’t have to worry about having a project with payment issues and the subcontractors, sub-subcontractors, and material suppliers don’t have to worry if the money is not flowing downstream because they have another avenue to resolve their payment problems.  

A) When is a payment bond required?

• A payment bond can either be required by law, meaning there are certain projects where it is mandatory to have one as per the law.

• In some cases, the payment bond may be required just by the owner or the lender. These are typically common in large scale projects where the owner or the lender can protect themselves against payment problems.  

B) What are the different types of payment bonds?

• Federal Projects – Payment bonds are required on federal projects as per the Federal Miller Act.

• State of Georgia Projects – Georgia, like most of the other states, has its own version of the Miller Act called as Georgia’s Little Miller Act.

• Georgia County and City Projects – In Georgia, there are two separate Little Miller Acts. One governs the state of Georgia projects while the other governs all Georgia county and city projects. For example, if you have a bond claim against a school board, it will fall under Georgia County and City Projects whereas a claim against the university system in Georgia will fall under the State of Georgia projects.

• The payment bond is required on both these types of projects as per Georgia’s Little Miller Act and they are applicable on all projects that are worth $100,000 or more.

• Private Projects – Payment bonds on private projects are not required by the law but they may be required by the owners and lenders. Since they are not required by the law, they may be governed as per the contract law. This means that you will have to make your claims based on whatever is mentioned in the payment bond. This is one reason why you should always get a copy of the payment bond, if there is one, early in the project.

How Do Payment Bonds Really Work?

So, how do payment bonds really work? Well, there are different parties involved in the process and you should have a clear understanding of who these parties are and under which category do you fall.

A) Parties involved in Payment Bond Claim

• Principal – First we have the principal, i.e., the party who is obtaining the bond. Typically, it is the general contractor or the first-tier subcontractor but the owner or a sub-subcontractor can also be the principal. Sometimes, in large scale projects you may see more than one payment bond.  

• For example, you will have one payment bond by the general contractor and then the general contractor may also require the subcontractor to obtain a payment bond to cover the sub-subcontractors and suppliers to that subcontractor.

• In such cases, you can make a claim against two separate principals.

• Obligee – The obligee is typically the project owner and the ultimate beneficiary of the payment bond. So, on public projects, it can be the Federal or State government and on private projects, it can be the owner.

• Surety – The surety is the actual guarantor of the bond. They ensure that the principal makes the payment. The surety is almost always an insurance company.

• Claimant – The person/entity who makes a claim against the payment bond is called the claimant.  

B) Suretyship v. Insurance

We mentioned above that there are sureties and insurance companies as well. So, what is the difference?

• When you deal with an insurance company, for example, automobile insurance and if you have an accident, then your insurance company will step up and pay for the damages. They may increase your premium, but you don’t have to pay them back the amount that they spend on the damages.

• With suretyship, it is indemnification. So, if a surety pays out on a payment bond, then the principal is obligated to pay it back to the surety. This is an important component of how the payment bond works.  

• The general contractor who is the principal will not want you to go after the payment bond because it could affect their credit rating, they will have to reimburse the surety, and in case lawyers get involved, they will have to bear the cost of the attorney’s fees as well.  

So, how do the suretyships ensure that they get their money?

• Well, they run a thorough credit background check on the contractors.

• They will also look at the project's size and scope and determine if the contractor can handle it.

• They also get letters of credit, personal guarantees, and take collateral.  

What Are the Prerequisites for Making a Payment Bond Claim?

Now that you have fair understanding of what a payment bond is and how it works, let’s take a look at some of the prerequisites for making a payment bond claim. There are several things that you must do to make sure that you have a payment bond claim, such as documentation and how the payment bond for each project has to be separate even if you are working with the same contractor on multiple projects. Apart from these, the other two main prerequisites are:

A) Have you complied with the Georgia Statutory Notice?

• On federal projects, there are no statutory notice requirements.

• However, there are requirements in the State of Georgia. If you are working on a State of Georgia project, Municipal project, or private project, and you want to make a claim against a payment bond, then you must give a Notice to Owner and Notice to Contractor.

• If you work for the general contractor directly or if you are a supplier to a subcontractor, then you don’t have to give notice. But if you are a third-tier subcontractor or lower, then you must send out the notice.

B) Do you have any Georgia Lien Waivers that have not been paid?

• Georgia’s lien waivers are slightly confusing and complicated. Typically, when you sign a lien waiver in Georgia, it is conditioned upon payment for 89 days. This means that you have up to 89 days to cancel your signed lien waiver if you have not received the payment.

• However, on the 90^th day, that lien waiver turns unconditional which means you cannot void or cancel it. So, if you have signed a lien waiver and you let it go for 89 days, then it means that you have given up on your payment bond rights. It also means that you are giving up on your lien rights (for private projects).

• In order to void a Georgia lien waiver, you have to file an Affidavit of Nonpayment within 89 days of the execution of the lien waiver.

How Do I Make a Claim?

There are three stages involved in the payment bond claim process:

• Before the claim is made.

• When the claim is made.

• After the claim is made.

A) Before the claim is made

Here are some of the key steps to take before you make the payment bond claim:

1. Review the payment bond thoroughly. As mentioned earlier, try to get a copy of the payment bond as early as possible so that you can understand who the primary parties are, i.e., the surety, principal, and obligee. You can also find out what the notice requirements are, etc.  

1. If the general contractor has filed a notice of commencement, then you can get the surety’s name from there or if it is a State of Georgia project, then you can request for open records and get a copy of the payment bond.  

2. You need to consider whether there are other payment bonds on the project. If it is a private project, then you may also have lien rights along with the payment bond. For example, you are working on a private project, and you have a contract with that entity.

1. Now, you have a contract claim, then the general contractor has a payment bond which is claim number one, then let’s say the subcontractor also has a payment bond, which is your claim number two, then since it is a private project, it means that you have lien rights, and finally in some cases, there may also be a personal guaranty from the entity.

2. So, in the above scenario, the claimant has five pockets of money to go after.  

3. This is why you have to look at all the payment sources and not just focus on the payment bond, especially if you are a supplier or a lower tier subcontractor.

3. Again, if it is a private project, check what lien rights you have apart from the payment bond rights.

4. Review your contract thoroughly to see what it says in terms of what rights you have, what are the different claims you can make, etc. If you have the Federal Prompt Payment Act or State of Georgia Prompt Payment Act, then you may be allowed to get interest, attorney’s fees, etc. So, make sure you are aware of what your rights are before beginning to make your claim.

5. Documentation is one of the most important tasks. You must gather all your documents, such as your invoices, delivery tickets, daily logs that show you on the project, approvals from higher-ups, engineers, architects, construction managers, etc. All of this will help in showing that you have performed the work as expected.

6. Finally, you need to calculate the amount owed to you and substantiate it with all the proper documentation.  

B) When the claim is made

Here are the things to bear in mind once the claim is made:

1. You must comply with the notice requirements in the payment bond.  

2. You must meet the claim deadline. Typically, it is 90 days from the last day you worked as per the State of Georgia and Federal government. Sometimes, a surety belonging to a different state may extend the deadline to 120 days. The key point here is that it cannot go below the 90-days deadline as per the law, but additional time can be given.  

1. Since private projects are not governed by statute, there is no minimum deadline. Ideally it is 90 days, but in some cases, it can also go down to 60 days or 45 days. This is why you need to get your hands on a copy of the payment bond as early as possible to know these deadlines.

3. You must send the notice to the proper parties. This is again something that you will find in the payment bond. If you fail to send it to the proper parties, then you may lose out on your payment bond claim rights. It should ideally go to the project owner, general contractor, and the surety.  

1. If you are not sure about all the parties, then just send the notice to as many people as possible to make sure that you are meeting the requirements.  

4. You can send in your back-up documentation as well even though you are not obligated to do so at this point of time. You can send in your outstanding invoices, payment apps, lien waivers, etc., to show that you have put in the efforts to enforce your claim.

5. An important step is to make sure that in your written notice, you are making a formal claim against the payment bond. There is no specific language to use, but you can put in something like, ‘we are making a payment bond claim’, ‘a claim is hereby made against the payment bond’, etc. Also, a good practice would be to use the phrase ‘any and all payment bonds’ so that you can cover even those payment bonds that you may not be aware of.  

1. Also, it is best to send out the written notice via certified mail or through any overnight courier as that would be easier to track.

C) After the claim is made

Below are the action items that are triggered after the claim is made:

1. Once you send your claim, you will typically receive an Acknowledgement of Claim letter. This is done to establish the deadline and to record when the claim was received.

2. Next, you will likely receive Proof of Claim. This is either sent along with the acknowledgement of the claim letter or later. It is basically a letter asking you to provide specific documents or it may be a form which you will have to fill out thoroughly and return it promptly. They basically want to see the amount, the backup documentation, the date you worked, who you are working with, a copy of your contract, etc.

3. Next, you will receive an initial decision. Earlier, the initial decision used to be that the claimant is right, and that money is owed to them. However, nowadays, the sureties will first question the principal and if there are any arguments, they may deny the claim.

4. If you receive a denial letter, don’t lose hope! You just must respond to it and provide all your backup documentation, additional evidence, photographs that show you performed the work, daily logs, records of weekly meetings, etc.

5. You also must be careful about the pay-if-paid and pay-when-paid provisions. If these contract provisions are beneficial to the principal, then they can also be beneficial to the surety. So, if the principal has not been paid and there is a pay-if-paid provision, then the surety can come back to you saying that we agree that you haven’t bene paid; however, you are not supposed to be paid yet because the principal has not received the payment yet.

6. As mentioned earlier, you must document each and everything as the documents will play a crucial role in making your case stronger.

7. Finally, you need to get a copy of the payment bond as soon as possible so that you can calendar the deadline to file suit in case it is necessary. The deadline can be one year from your last date of work, or it could be some other benchmark. But you must be aware of it in advance so that you don’t let the claim lapse while waiting to negotiate it.  

A payment bond is an important tool that construction professionals can leverage to resolve their payment issues; however, if you don’t understand how, it works or if you fail to follow its mandatory requirements, then you can easily lose your payment bond rights as well.  

Key Takeaways

1. Payment bonds are crucial for ensuring that subcontractors and suppliers get paid on construction projects. They are especially important on public projects where they are often required by law.

2. Different projects require different types of payment bonds, including federal projects under the Miller Act, Georgia state projects under the Little Miller Act, and private projects where bonds are required by contract.

3. The main parties in a payment bond claim include the principal (usually the general contractor), the obligee (typically the project owner), the surety (the bond guarantor, often an insurance company), and the claimant (the entity making the claim).

4. Key prerequisites include complying with Georgia's statutory notice requirements and understanding the implications of lien waivers, particularly the 89-day conditional period before a waiver becomes unconditional.

5. Before filing a claim, it's essential to review the payment bond, gather documentation, and consider other potential sources of payment, such as lien rights or additional bonds.

6. The claim process involves sending notice to the correct parties, meeting deadlines (usually 90 days from the last day of work), and ensuring that all necessary documentation is submitted to support the claim.

7. If a claim is denied, it's important to provide additional evidence, such as contracts, invoices, and project documentation, to support the case and challenge the denial.

8. Thorough documentation is critical throughout the process, from proving the work performed to calculating the amount owed and can significantly impact the outcome of the claim.

9. Understanding the deadlines for filing a lawsuit if necessary and the potential impact of contractual provisions like pay-if-paid clauses can help ensure that payment rights are preserved.

Common Questions Contractors Ask

What is a payment bond, and how does it protect contractors, subcontractors, and suppliers?

A payment bond is a type of surety bond that guarantees payment to subcontractors, suppliers, and laborers involved in a construction project. It ensures that these parties are paid even if the general contractor fails to make payments.

When is a payment bond required in Georgia construction projects?

Payment bonds are required on federal projects under the Miller Act and on state, county, and city projects in Georgia under Georgia's Little Miller Acts. They may also be required on private projects by the owner or lender, though not mandated by law.

What steps must be followed to file a payment bond claim in Georgia?

To file a payment bond claim in Georgia, construction professionals must follow specific steps, including sending a Notice to Owner and Notice to Contractor, ensuring compliance with statutory deadlines, and properly documenting the claim.

What are the prerequisites for making a payment bond claim in Georgia?

Key prerequisites include complying with the Georgia Statutory Notice requirements, ensuring there are no unpaid Georgia lien waivers, and maintaining proper documentation of the work performed and payments due.

How does suretyship differ from insurance, and how does it impact payment bond claims?

Suretyship involves indemnification, meaning the principal must reimburse the surety for any payments made on a bond claim. This differs from traditional insurance, where the insurer absorbs the cost. Understanding this distinction is crucial when pursuing a payment bond claim.

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