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May 5, 2017

What every contractor should know about bonds

  • As construction projects get more complicated, bonding issues follow suit.
    • By SETH MILLSTEIN
    Pillar Law PLLC

    mug
    Millstein

    No one can claim to be a stranger to this phrase: “My word is my bond.”

    If this phrase were true, and if the person saying it were Warren Buffett, the need for so many types of bonds for construction projects in Washington would evaporate.

    But there is only one Warren Buffett. And it’s hard to take people at their word. This is especially true today when — in a city like Seattle — so much new construction means so many new relationships.

    With newer relationships, there is less history. With less history, there is often less trust. We also live in an age of hyper-litigation. So even if you were contracting with Warren Buffett to build him a new home, and even if he hired you on a handshake only, that still might not be enough.

    Hence the incredibly large and complex world of bonding issues in the construction world. Bonds range from massive (public works) to minor (private liens). This article is intended to provide a brief overview. It addresses a few common types of construction bonds.


    PRIVATE PROJECTS

    CRA bond

    General contractors in Washington, those requiring use of more than one craft or trade on a given project, must actively carry a $12,000 bond. Specialty contractors must post a $6,000 bond.

    • Purpose. The purpose of a CRA bond is to provide security to members of the public when hiring a contractor in Washington. In other words, if a contractor does not perform properly, ends up owing money and fails to pay, the bond then must pay.

    • Details. Those entitled to recover from a general contractor’s bond include owners, subcontractors, material suppliers and state agencies. However, a general contractor is not permitted to make a claim “downstairs” against its subcontractor’s CRA bond.

    • Recovery process. In other states, a claim on a contractor’s bond can simply be initiated by filing a notice with the appropriate agency. Here in Washington, the only way to make a “claim” against a contractor’s CRA bond is to file a lawsuit. The CRA bond company must be named as a defendant to this action. Residential owners are entitled to recover the full amount of the CRA bond and also get first priority to its proceeds. The CRA bonding company must be served through the state Department of Labor & Industries, by mailing copies of the pleadings to L&I with a check for $50 by certified mail. The CRA bond is obligated to pay when there is an unpaid judgment against the contractor.

    • Wrinkles. CRA bonds are relatively small. Homes in King County now sell for an average of $700,000, yet the CRA bond amount of $12,000 or $6,000 (for trades) has not changed in years. If there are multiple claims, each party in the same priority tier (such as owners) is then entitled to recover only a percentage share of the remaining CRA bond. In other words, after figuring in attorney fees and costs, net recovery can be very low considering a successful lawsuit is required to collect from a CRA bond.

    Also worth noting: a CRA bond is not insurance. A CRA bond is only available if the claimant gets a judgment against the contractor and the contractor does not pay. A CRA bond does not “defend” a contractor. A CRA bond is simply a backstop. It is intended to provide some measure of security if a claimant obtains a judgment against a contractor and the contractor fails to pay.

    Lien release bond

    • Purpose. If a contractor liens a property, and the owner wants to sell the property, a lien release bond is required. Often this is called “bonding around” a lien. A lien release bond frees up the property. Security is shifted from the property itself to a dedicated release bond. In general, the release bond must be twice the amount of the lien, if the lien is under $10,000. If the lien exceeds $10,000, the release bond must be 1.5 times the lien.

    • Details/recovery process. For a contractor whose lien has been “bonded around,” the perfection process is the same as foreclosing on a lien. The difference is that the bond company (also called a surety) is named as a defendant to the action. To perfect, the foreclosure suit must be filed within eight months of the date the lien is recorded. If and when the contractor prevails, and the claimant remains unpaid, then the surety issuing the release bond is liable.

    • Wrinkles. Be careful if you have recorded a lien and the lien has been “bonded around.” Make sure that the company issuing the bond is permitted to do so, and that the language on the face of a release bond aligns with the statute. And be aware that this area of the law carries a measure of confusion when naming proper defendants to the action. Here, as in other areas, an attorney familiar with such bonds should be consulted prior to expiration of the eight-month window.

    P&P bond

    • Purpose. A payment and performance (P&P) bond is common on commercial jobs, and may be considered on high-end residences too. If the owner requires the general contractor to post a P&P bond, the intent is to protect the owner in the event the general contractor defaults. The P&P bond would then allow the owner to tap funds to pay unpaid subcontractors and suppliers, and hire another contractor to complete the project.

    Often general contractors require their subcontractors to post P&P bonds too. The idea is the same. If the subcontractor defaults, the general can pay its suppliers or sub-tier subcontractors, and hire another subcontractor to complete a given scope of work.

    • Details/recovery process. Private P&P bonds are not statutory in nature. Recovery requirements therefore vary from bond to bond. It is important to read the P&P bond carefully before proceeding, and to provide proper notice accordingly. Typically proof of default and debt is due to the surety. The surety is then afforded first opportunity to pick up the pieces for the defaulting party. If this fails, and a suit is filed to recover, the P&P surety would also be a named defendant.

    • Wrinkles. P&P bond companies often require significant documentation prior to paying, or stepping in to complete the project. The issue therefore is timing. If the documentation and approval process is lengthy, the project could stall, costing more money. P&P bonds, like all bonds, often limit the range of their liability, including various consequential damages.


    PUBLIC PROJECTS

    P&P bond

    On state work projects, the general contractor is statutorily required to post a P&P bond on projects exceeding $25,000. The amount of the bond is also fixed by statute, which varies depending on the size of the project. State P&P bonds are for the benefit of all unpaid laborers, subcontractors and suppliers.

    On federal projects, a Miller Bond must be posted, which also provides security for parties providing labor and/or materials on a job. However, only parties contracting with the prime contractor or a first tier subcontractor are protected by the Miller Bond. Below that, there is no protection by way of a bond claim. With state bonds, protection runs further downstream, including more parties involved.

    • Details. Claims must be formally sent to the proper public agency within 30 days of formal acceptance of the entire project for bonds, and 45 days after completion of construction for retention, defined as an amount held back by the owner to provide additional security. Suit must then be filed within four months of serving the claim notice. Claims can be extended, if renewed prior to acceptance, and within the four-month duration of the claim period.

    • Wrinkles.

    State: Pre-claim notices are only required for parties not contracting directly with the general or prime contractor, also known as second-tier subcontractors and suppliers. In any event, suit should not be filed within 30 days of the date of your claim or properly amended claim. If a contractor files suit too soon, recovery of statutory attorney fees is prohibited.

    Federal: Only those below first tier subcontractors must provide notice to the prime contractor. This must occur no later than 90 days after the claimant’s last date it furnished labor or materials. Suit must be started within one year from the last date the claimant furnished labor or materials.

    Retention release bond

    The government agency must “holdback” or retain 5 percent of the contract amount from the prime contractor on state projects. Prime contractors often need this money before the project has been formally accepted. In such cases, a prime contractor can post a retention release bond. Such bonds permit the agency to promptly release retention to the prime prior to acceptance. A subcontractor or supplier’s security, flowing from a retention claim, is then shifted to a release bond. If a prime contractor posts a retention release bond, a subcontractor can post one as well, if the subcontractor chooses to get its funds earlier.

    • Details. Check the bond for details. Technically the retention bond is named as a defendant instead of the government agency in the lawsuit, since the agency no longer holds the retention after disbursal. To be safe, both could be named as defendants. Then, upon proof from the agency that it is holding zero retention, a stipulation can be entered to relieve the agency.

    • Wrinkles. There is always a cost to purchasing a bond. Like all bonds, posting a retention release bond can be expensive. Whereas the cost of other bonds is often rolled into the contract price, this is not true for retention release bonds, which are voluntary in nature. The contractor must therefore pay premiums and post collateral at its own expense.

    In a nutshell, bonds can be complicated. Today, as construction projects get more complicated and increase in volume, bonds and bond issues promise to increase too.

    Seth Millstein has been practicing construction law for 13 years in Washington, and formed Pillar Law seven years ago. His firm focuses on liens, bond claims and litigating construction contract disputes.


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