Payment Bond Claims in Texas: The Basics of Filing and Deadlines

In this blog, presented by SunRay Construction Solutions and Rebecca A. Hicks, Managing Partner, Hicks Law Group, construction professionals in Texas can learn in detail what is a payment bond, which projects are covered by a payment bond, how to get a payment bond, what are the deadlines to follow, and more.  

Key Questions that Determine Lien/Bond Claim Rights

Before you start working on any construction project, you must ask and find the answers to the below key questions as they will help in determining your lien/bond claim rights.

1. What is the correct name and location of the project? What were they building or working on?

2. Who is the owner (Private, State, Local Government, Federal)?

3. What is your position in the construction chain?

4. What months were your labor/materials provided to the project?

5. Is there a payment bond?

Who is the Owner?

These are the four types of jobs that you can possibly have that make a difference in how you perfect your claim in Texas:

• Private Project – A private project is any job that is owned by somebody that is not a governmental entity. So, projects like commercial construction projects, shopping centers, residential developments, apartments, etc., are all considered as private projects.  

• Also, you need to look at the deed of the property to know who exactly owns the property.  

• Another key point to remember is that private projects do not have to be bonded. In fact, most of them are not bonded; however, as Chapter 53 of Texas Property Code, any private project can also be bonded.  

• So, even if you are working on a private project, always make sure to ask whether there is a payment bond on the job.

• State or Local Government Project – Projects that involve public schools, fire stations, city and county buildings, TXDOT, etc., are considered as state or local government projects.  

• These types of projects are required to be bonded as per Chapter 2253 of the Texas Government Code.  

• If you are working on a state or local government project, you must ask for a copy of the payment bond up front during your project research.  

• Federal Public Works Project – Projects that involve military bases, post offices, federal buildings, etc., are considered as federal public works projects.  

• These types of projects will always be bonded, which means that you should ask for a copy of the payment bond in the initial stages of the project.

• Public Private Partnership (P3 or PPP) Project – Public Private Partnerships are contractual agreements between public and private entities in which private entities are significantly involved in the delivery and financing of the projects.

• These are treated like local government projects which means that as per Chapter 2253 of Texas Government Code, these projects are required to be bonded.

• In such projects, the financial risk of the project is shifted from the public entity to the private entity.  

What is a Payment Bond?

So, what exactly is a payment bond? It is the equivalent of an insurance policy that is purchased by the general contractor on the job. The insurance company is the surety, and the payment bond states that if the general contractor does not pay his subcontractors and suppliers, then the payment bond will take care of the payment.  

The owner will not be liable to make the payments, and they don’t have to be worried that their property might get liened.  

What are the Types of Bonds?

Graphic – Types of Bonds -

• Performance Bond: Focus on it if you're concerned about the contractor’s ability to complete the project, but not relevant for payment claims.

• Payment Bond: This is your primary focus when making payment claims.

• Subcontractor Payment Bond: Check for a separate bond if you're a subcontractor, as it may impact your claim rights.

Typically, there are several types of bonds used in these construction projects. Let’s look at some of the gotcha-types of bonds -

1. Performance Bond

• Purpose: A performance bond ensures that the general contractor will complete the work as per the terms of the contract. If the general contractor defaults or fails to meet the performance standards, the bond will cover the cost of hiring another contractor to finish the work.

• Focus: You typically do not need to focus on the performance bond when perfecting a payment claim because it is designed to protect the project owner, not subcontractors or suppliers.

• How to Identify: A performance bond will generally be labeled "performance bond" at the top of the document. If it doesn't mention the payment bond, it's not the correct document for your claim.

2. Payment Bond

• Purpose: A payment bond guarantees that subcontractors, suppliers, and laborers will be paid if the general contractor fails to do so. This bond protects those who work on the project but have not been paid.

• Focus: When making a claim, the payment bond is the one you need to focus on. It ensures that those who provided materials or labor are paid if the contractor defaults on payments.

• How to Identify: A payment bond will clearly state "payment bond" at the top. It may be sent together with a performance bond, but only the payment bond is relevant for claims.

3. Subcontractor Payment Bond

• Purpose: This type of bond is becoming more common on certain projects. It’s similar to a standard payment bond but applies specifically to subcontractors.

• Focus: Subcontractors must be aware of this bond as it guarantees payment for work performed by the subcontractor, not the general contractor.

• How to Identify: Look for bonds labeled as "subcontractor payment bond." There will typically be two bonds on the project if both a general contractor payment bond and subcontractor payment bond are in place. You must be aware of both to perfect claims on either.

The reason why you don’t have to worry about the performance bond is because it is a different type of insurance policy procured by the general contractor which guarantees the owner that if for some reason the general contractor defaults and stops performance, the insurance company surety is guaranteeing that they finish the job instead.  

In short, the performance bond is to protect the owner in this situation where the general contractor doesn’t perform for some reason.

• Another type of gotcha bond is the subcontractor payment bond. Although payment bonds are common, more and more jobs are requiring subcontractor payment bonds as well.

• If it is a subcontractor bond, then the principal on the bond will be the subcontractor and not the general contractor. This means that there will be two bonds on the project, and you need to know about both of them so that you can make a claim on both the bonds.

How to Get a Payment Bond?

Now that you know about the jobs where there could be a bond, let’s look at how to get a copy of that payment bond.

• The best practice is to always try and get the bond upfront, in the early stages of the project by asking the general contractor who posted the bond to give you a copy of the bond.

• If you know the surety or bonding agent, you can ask them to provide a copy of the payment bond as well.

• Sometimes, on private projects, you can find the payment bonds recorded in the real property records. So, make sure that you know how to look in the real property records and just see if the payment bond is there.

• If you are working on a government job, you may need to make a Freedom of Information Act (FOIA) request to get a copy of the payment bond. But bear in mind that sometimes it takes the government a while to respond to that, so you'd need to make that request early, long before any bond claim deadline. It is usually a pretty simple online form that you fill out and give them the information about the job for which you are asking a copy of the payment bond.

One thing that you need to make sure of is to always try and get an actual copy of the payment bonds rather than having someone write out the bond number or the bond information because in most cases, the information provided is incorrect. You must make sure that you have 100% correct bonding information because if you make any technical errors in your bond claim, then your claim will get denied.  

How to Place a FOIA Request?

Graphic – Steps to Face a Place a FOIA Request -

1. Step 1 - Google “[Governmental body] open records request” (e.g., City of Dallas Open Records Request).

2. Step 2 - Enter the company information.

3. Step 3 - Specify the information you need (e.g., a copy of the payment bond).

4. Step 4 - Provide details of the record you're requesting and as much information as possible

Here are the steps to place a FOIA request -

1. Step 1 - One of the easiest ways is to just Google it by typing in “Governmental body” open records request. For example, City of Dallas Open Records Request.

2. Step 2 - Then you fill in the company information.

3. Step 3 - Fill in what information you require, i.e., a copy of the payment bond.

4. Step 4 - Specify what record you are requesting and provide as much information as possible.  

It can ideally take up to two weeks for the governmental body to respond to your request, so make sure that you make the request long before any bond claim deadline.

What is my Deadline?

Knowing the deadlines for the different types of claims is absolutely crucial. Different types of projects have different deadlines, and failing to meet these deadlines can result in you losing your claim rights.  

Below are the deadlines that you have to meet for a private project bond claim.

• You must send the Preliminary Notice to the Owner and GC by the 15^th day of the third month. For example, if you have performed work in the month of January, then you need to send out the notice by the 15^th day of April.

• There is a statutory form in Texas, so make sure you use this form and do not change anything in it.

• The notice should be sent to the owner, GC, and to the surety as well. According to Chapter 53 of the Texas Property Code, that notice letter is your bond claim.

A) Steps to Perfect Bond Claim on Private Project

The deadlines for private project bond claims are the same as private project lien claims. In lien claims, you have the additional step of filing the mechanics lien whereas for bond claims, you just must send out the notice to the owner, GC, and surety. Here are the steps to perfect a bond claim on private projects:

1. Step 1 - Send out all required notices to perfect the lien claim.

2. Step 2 - Include the surety in the notice letters to ensure they are informed.

3. Step 3 - File the mechanics lien (even though it’s not required) for added protection.

4. Step 4 - Send a copy of the filed mechanics lien to the surety for their records.

B) Who Gets the Notice?

One of the most crucial aspects of perfecting your bond claim is to ensure that the notice is going to the right people and address. So, the notice must go to:

• Whoever you contracted with: Send it to their principal place of business and registered agent as per the Texas Secretary of State (SOS) website.

• General Contractor: Send it to their principal place of business and registered agent as per the Texas Secretary of State (SOS) website.

• 1^st Tier Subcontractor: Send it to their principal place of business and registered agent as per the Texas Secretary of State (SOS) website.

• Surety: Notice address on Bond and registered agent from Texas Department of Insurance.

You can find the information regarding registered agents on the Texas Secretary of State website. It is a paid subscription service where you will have to pay a minimal amount for each search. The information regarding the surety’s registered agent can be found on the Texas Department of Insurance website.  

C) Steps to Perfect a Claim on a Subcontractor Bond

We had earlier mentioned that some projects may also have a subcontractor bond. So, how do you perfect a subcontractor bond claim?

• Subcontractor bonds are not governed by any of the Texas statutes, instead it is governed by whatever is in the bond. So, you need to read the bond thoroughly to understand the requirements and do as it say.

• If it has a particular deadline for getting the notice out, you need to meet the deadline in the bond.  

• If it has any information that you need to provide, then you must provide that information as per the terms of the bond.

Since a subcontractor bond is not a statutory type of bond, you just must read it and make the claim accordingly.

Below are the deadlines that you have to meet for state and local government projects.

• You need to send out the preliminary notice by the 15^th day of the second month after each month that you provide material or provide labor for the job. For example, if you performed work in January, then the preliminary notice has to go out by 15^th March.  

• These deadlines run from the date that you perform labor or materials on the job, and they run from each month. If you fail to send out the notice on time, then you will lose your bond claim rights.

Even if you are in a contingent payment situation or a pay if paid situation, you still need to make your bond claim because if you don’t, then you lose your rights.  

• To make the actual bond claim, you will need to send a separate bond claim letter by the 15^th day of the third month after each month that you performed labor or materials for which you have not been paid.  

• This means that if you are continuing to work on the job and haven’t received payment for several months, you may have to make multiple bond claims.  

Ideally, the preliminary notice on these state and local government jobs just has to go to the general contractor. However, the best practice is to send it to everybody above you in the construction chain. You don’t have to send it to the governmental entity because they are never going to be liable; however, you can copy them in the letter if you want to.  

Next Step – Bond Claim Notice Letter

So, the second notice, that is the letter that you send by the 15^th day of the third month, is your actual bond claim letter and there is some specific language which needs to be included in it:

• This written notice of claim must include a sworn statement of account stating that (1) the amount of claim is just and correct, and (2) that all just and lawful offsets, payments, and credits known to the affiant have been allowed.

A sworn statement is basically a statement of fact signed by somebody with knowledge and it is notarized. So, the bond claim letter and sworn statement of account goes to everybody above you in the construction chain, as well as to the surety.  

Information for Payment Bond Claims

Claimants should make sure that they have all the information correct on the payment bond claims.

• One of the most common mistakes that claimants make is with regards to the address. You have to make sure that you have the correct addresses of the general contractor, surety, etc., so that the payment bond claim goes to the intended people.

• The registered agent of the surety should match the information available to the Texas Department of Insurance.

• Make sure that you have mentioned the correct name of the project, and it is as per what is on the payment bond.

• Provide a detailed description of the equipment and/or materials furnished to the project.

• One of the best practices is to attach copies of the invoices that are unpaid, copies of the unpaid pay applications, etc., because if you don’t attach it to the initial letter, the surety will ask for it later on.  

Claims for Unpaid Material Under Unit Price Agreement

There is a specific section of Chapter 2533 that focuses on unit price contracts. There is very little Texas law on what a unit price contract is, so, you will need to include some additional language in your sworn statement of account to account for the unit price contract terms.

Limitations

Once you have made your bond claim on a private project or a Chapter 2253 project, if for some reason the surety does not make the payment, then you have one year to file the claim. So, once you have made the claims, make sure to keep track of the deadline to file a lawsuit.  

You will ideally need an attorney to file a suit against the surety as well as against whomever you have contracted with.

Miller Act Claims

Federal bond claims are a lot easier than state bond claims. The deadline is longer, and the claim form is easier. All you need to do is send out one notice 90 days after you have last furnished materials or labor to the project. This is the only requirement on a federal claim.

The downside of these federal projects is that, if you are a second-tier or below, then you are not protected. In such cases, what you need to do is ensure that the party above you in the construction chain has perfected their bond claim, including the money owed to you.

If you have made a bond claim on a federal project, then the deadline to file a lawsuit, if the surety has not made the payment, is one year.

What About After You Have Perfected a Bond Claim?

Let’s say you have perfected your bond claim and sent it to the surety, what’s next?

• The surety will send a standard response asking:

• The claimant to verify it is a claim; or

• For additional information to document the claim.

Once you receive this letter from the surety, make sure that you are providing all the requested information. Even if you have already provided the information with your initial letter, it is best to provide it again, so that the surety can verify everything and make the payment.

Also, remember that if the surety does not make the payment, then file the lawsuit long before a year passes from the date you mailed that claim.  

Key Takeaways:

1. Understanding Payment Bonds: A payment bond is an insurance policy that guarantees subcontractors and suppliers are paid if the general contractor fails to do so, protecting both the property owner and the workers involved.

2. Types of Projects Requiring Payment Bonds: Payment bonds are required for state, local government, federal public works, and public-private partnership projects. Private projects may or may not have a payment bond.

3. Importance of Asking for the Bond: Always ask for a copy of the payment bond early in the project, especially for government jobs, where a FOIA request may be necessary to obtain it.

4. Perfecting a Bond Claim: For private projects, send the preliminary notice to the owner, general contractor, and surety by the 15th of the third month after work. For government projects, the deadline is typically the 15th of the second month.

5. Correct Documentation: Make sure the payment bond information is accurate, including addresses, project names, and unpaid invoices. Inaccuracies can lead to claim denial.

6. FOIA Requests: To get a copy of a payment bond for a government project, use the "open records request" process, which may take up to two weeks.

7. Deadlines Are Crucial: Missing deadlines for submitting notices or claims can result in losing bond claim rights. Always track and meet the required timelines.

8. Subcontractor Bond Claims: If the project requires a subcontractor bond, read the bond's terms carefully, as it is governed by the bond itself rather than Texas statutes.

9. Federal Project Claims: Federal bond claims are simpler and have longer deadlines (90 days for notice). However, second-tier contractors are not automatically protected and must rely on the above parties to perfect their claims.

10. After Perfecting the Claim: Be prepared for follow-up from the surety requesting further documentation. If payment is not made, lawsuits may be necessary within one year from the claim submission.  

Common Questions Contractors Ask

1. What is a payment bond, and how does it work?

A payment bond is a type of insurance purchased by the general contractor to ensure that subcontractors and suppliers get paid. If the general contractor fails to make payments, the surety (the insurance company) covers the cost. The owner is not responsible for these payments.

2. Which types of construction projects require a payment bond in Texas?

Payment bonds are typically required on state or local government projects, federal public works projects, and public-private partnership projects. Private projects do not always require a payment bond, but they can be bonded voluntarily.

3. How do I get a copy of the payment bond for my project?

The best practice is to request a copy of the payment bond upfront from the general contractor or surety. For government projects, you can file a Freedom of Information Act (FOIA) request to obtain the bond details.

4. What are the deadlines for submitting a payment bond claim in Texas?

For private projects, you must send the notice to the owner, general contractor, and surety by the 15th day of the third month after you’ve provided labor or materials. Deadlines for state and local government projects are shorter, and notices must be sent by the 15th day of the second month.

5. What should I include in my bond claim notice?

Your bond claim notice must include a sworn statement of account, detailing the amount owed, and must be notarized. Attach any supporting documentation, such as unpaid invoices or pay applications, to strengthen your claim.

6. What happens if the surety does not pay after I file a bond claim?

If the surety does not make the payment, you have one year to file a lawsuit. It's important to keep track of this deadline and consider consulting an attorney to pursue legal action against the surety or the contractor.