Bonding Off a Mechanic’s Lien: What Is It?
Bonding Off a Mechanic’s Lien: What Is It & What Does It Mean for You? Once a mechanic’s lien is filed, there is an opportunity for the lien to be...
The construction credit world is chock full of industry-specific terms and definitions; sometimes it’s tough to keep them straight. “Bond” is one of those terms. Is it a payment bond, performance bond, bid bond, contractor’s bond, prevention bond, discharge bond? And, who is a party to a bond?
Although this isn’t an exhaustive list, it shows the top hits:
A payment bond is a surety bond, particularly on public projects, issued as an assurance of payment to certain parties should the principal of the bond breach their construction contract. Bonus: In Canada, a payment bond is often referred to as a Labour and Material Payment Bond.
“We asked an NCS payment bond expert,
A performance bond is issued to one party of a contract as a guarantee of the performance of the other party to meet the obligations specified in the contract.
Heed! Payment and performance bonds are often issued together, but they guarantee very different things: payment bonds guarantee payment, performance bonds guarantee performance.
At NCS, we don’t work too closely with bid bonds, though we do see them. The key to remember here is a bid bond is used during the bid process and is for the protection of the obligee (the party requesting the bids). A bid bond guarantees the contractor will accept the award of a contract under the terms stated within their bid or the surety will compensate the obligee.
Inside Scoop: In some states, a bid bond converts to a payment bond! Ohio provides a form of bond that at first is just a bid bond. If the contract is awarded to the principal of that bond, the bond then transforms into a payment and performance bond. HOWEVER, the bond only converts to a payment bond once the contract has been awarded.
Although prevention bonds & discharge bonds are not the same, I put them together because they share the same goal: attach security to the bond rather than the property.
You may be familiar with discharge bonds if you have ever received notification that a lien has been bonded off or bonded around. A bonded off lien does not eliminate your rights, it changes your rights. Instead of pursuing the claim against the property, you would pursue the claim against the bond.
In some states, such as California, a contractor is required to obtain a bond before they can get a contractor’s license.
According to The Contractors State License Board, “The bond or cashier’s check is filed for the benefit of consumers who may be damaged because of defective construction or other violations of contractors’ state license law, and for employees who have not been paid wages they are owed.”
Essentially, this bond obligates the contractor to adhere to various rules/regulations and helps protect consumers and other businesses mitigate loss if issues such as fraud arise.
Earlier, Mark mentioned it’s important to know who the principal of the bond is. The principal, sometimes referred to as the obligor, is the party on the bond that has an obligation to pay the debt. In construction, we frequently see bonds where the General Contractor is the principal or obligor.
The other important party on the bond is the obligee. The obligee is the party the principal is bound unto or contracted with. I mentioned we frequently see bonds where the GC is the obligor, which would make the project owner the obligee.
GC’s aren’t the only payment bond principals. We do encounter bonds where the principal is the subcontractor and the obligee is the GC. Always carefully review the bond! Player Recap:
Each state has its own statutes requiring payment bonds on construction projects. Some statutes may require the general contractor to obtain a payment bond on every construction project, and other states may only require a payment bond when the total value of the construction project exceeds a certain threshold.
If the payment bond is required by statute, claimants will most likely be defined by the statute. In some cases, the statute may refer to the terms of the bond, or the bond may not be covered by a statute (think subcontractors’ bonds), and the bond must be reviewed to determine the definition of a claimant.
Bonding Off a Mechanic’s Lien: What Is It & What Does It Mean for You? Once a mechanic’s lien is filed, there is an opportunity for the lien to be...
Montana Lien & Bond Claim Rights: What You Should Know Furnishing to a construction project in Montana? Then you’ll certainly want to review today’s...
Furnishing to a Wisconsin Construction Project? Here’s What You Should Know in order to Secure Payment Furnishing to a private construction project...