Conditional Payment Bond Trap

Payment bonds and liens are typically established to ensure that the general contractor and subcontractors are guaranteed to receive proper compensation. However, many subcontractors may be unaware of the differences between standard payment bonds and conditional payment bonds and will end up unknowingly nullifying the agreement. Therefore, subcontractors must learn the dangers associated with a conditional bond so they can avoid them in the future.

Standard Payment Bonds

Typically, general contractors purchase standard payment surety bonds. Under these agreements, notices of commencement are routinely completed but not legally required. At times, pay-when-paid clauses are still included in these contracts and a subcontractor must only file a notice-of-non-payment on the project within 90 days of completing services and file suit on the surety within one year of the completed work. If these requirements are fulfilled, the subcontractor will receive proper compensation.

Conditional Payment Bonds

Conditional surety bonds differ from standard payment bonds, because subcontractors file a claim against the general contractor if the subcontractor is aware that the owner has paid the general contractor but the general contractor has not, in turn, paid the subcontractor. It is only when the owner has not compensated the general contractor that the subcontractor can can place a construction lien on the property itself. This will prevent the owner from refinancing or selling the property without first paying off the lien. It many scenarios, it may be difficult for the subcontractor to know whether the general contractor is receiving payments or not and therefore, the subcontractor does not sure which step they should take next.

Complications Associated with Conditional Payment Bonds

In order to put a lien into effect, subcontractors must follow the proper procedures for payment bonds and lien bonds, by notifying both the surety and the contractor. Frequently, the subcontractor will only do one or the other. For instance, if the general contractor is encouraging the subcontractor to file a complaint against the owner because the general contractor is not being paid, the subcontractor may forget they must also formally notify the general contractor as well. If not, the claim will become void and the subcontractor will lose their ability to file a lien against the owner directly.

Reliable Surety Agencies

As a subcontractor, you must carefully review all fine print on bonds that are attached to a notice of commencement. After understanding the terms, you should properly follow the requirements to protect your rights and make sure you receive the compensation you deserve. A surety bonding company, such as ProSure Group Inc. can simplify complicated legal terms into easy to understand language so you can clearly know how to proceed. Contact our office today to ask questions or for assistance knowing which bonds you should establish.