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Construction bonds: What they are and how to collect them

by | Dec 28, 2021 | Construction Law

In construction projects, it is important for contractors to follow the terms of the contract to ensure all obligations have been fulfilled. It is also important that the construction project be completed by the agreed upon date. This is especially true to when the construction project involves a government or public works project. When doing construction work for the government or other public works companies, it is necessary for the contractor to use a bond. This helps ensure financial safety for the owners.

What are construction bonds?

A bond is used by investors in construction projects. This is specifically needed for various types of construction projects, like government or public works projects. These construction bonds provide assurance to the owners of the project that the contractor will meet the terms of the agreement. This can help hold the contractor accountable to stay on schedule and within budget, while at the same time keeping up with the safety and quality standards. When a contractor is required to obtain a bond for a construction project, they must go through a surety company. The surety company essentially “backs” the contractor. A surety company evaluates the general contractor and may choose to provide them a bond.

Construction bonds are necessary for government projects

Who is involved in the bond collection claims?

  1. Principal

A principal is the company or person that seeks a bond. This is typically the general or prime contractor for a construction project.

  1. Surety Company

A surety company is the company that provides the bond for the construction company or prime contractor. Essentially, they conclude that the construction company has the means necessary to complete this project. If the construction company is not completing the terms of the contract, a surety company will be held responsible (i.e. paying the parties that the construction company is unable to pay). If the surety company must pay on behalf of the prime contractor, the prime contractor will be required to pay them back.

  1. Obligee

The obligee is the person that is protected by the bond. This is typically the owner of the project that hires the contractor.

What are the main types of bonds?

There are three main types of bonds that are typically needed for contractors interested in working on a government or public works project. These include a bid bond, performance bond, and payment bond.

  1. Bid bond

A bid bond is needed when a contractor would like to bid on a project. This bond is needed in order to protect the owner in the event that the winning contractor backs out or fails to provide the next bond, the performance bond. A bid bond helps assure the bidder (contractor) will enter the contract once their bid is accepted. If the chosen contractor does back out, this also will help assure safety for the owner because the next lowest bid is typically considered and a compromise between the lowest and second lowest bid is found.

  1. Performance bond

A performance bond takes the place of a bid bond once a bid is accepted. This, again, helps protect the owner from financial loss if the contractor’s work is subpar, defective, or does not meet the terms set out in the contract. This may include items like the agreed upon price and schedule that the contractor must meet.

  1. Payment bond

This helps assure the owner that the contractor has the financial means to compensate their workers, subcontractors, and suppliers. Construction liens cannot be placed on public property, so this is another means to help protect subcontracts and suppliers from being financially hurt from contributing to the project.

What are some laws that outline these bonds?

Contractors need to be aware of and in compliance with many different federal and state statutes. In regard to construction bonds, there is a federal statute, The Miller Act, that outlines items related to the bonds that are required. There are also state statutes that involve construction bonds. These are referred to as Little Miller Acts, which further outline bond requirements for that specific state.

The Miller Act

The Miller Act is a federal law that involves contractors working on government construction projects. This law states that if the job is valued over $100,000, the contractors need to secure both a payment bond and performance bond to be able to bid and enter into the project’s contract.

The Wisconsin Little Miller Act

The Wisconsin Little Miller Act is a Wisconsin state law which states that contractors are required to hold payment bonds if the job is over $10,000, and both payment and performance bonds are required for jobs over $30,000.

The Illinois Little Miller Act

The Illinois Little Miller Act requires payment and performance bonds for contractors when they are working on a state project valued over $50,000 or state subdivision projects that are $5,000.

What are the steps in bond collection?

An owner, subcontractor, or supplier may need to file a bond claim due to the performance and/or payments made by the prime contractor. There are steps that need to be taken for bond collection claims to be successful.

Send a notice

The first step in a bond claim is to send a preliminary notice. In Wisconsin, a notice must be filed within 60 days from first providing labor or materials to the project. In Illinois, there is no preliminary notice deadline.

File Claim

The second step is to file a claim. In Wisconsin, the person needs to file within one year of the project completion. In Illinois, the person who wants to file a bond claim has a 180-day deadline from the date of the last materials/labor provided. There must also be a copy of the claim sent to the contractor within 10 days of filing.

Communicate with surety company

After a bond claim is filed, the surety company will conduct an investigation into the claim. The surety company will need any evidence and a sworn claim to start an investigation into the claim. The surety company will then communicate with their client to make a decision on whether to approve or deny the claim.

File a lawsuit

If the prime contractor and surety company are unreasonably delaying the process, a lawsuit may be necessary. This step is not often needed and is more or less a “last resort.”

How we can help you with your bond collection

We understand how important it is to uphold the terms of the contract so that all parties benefit. Bonds can help protect your financial status when involved in a large construction project when liens aren’t available. We can help you pursue your bond claims today. Give us a call at 262-252-9122 to schedule an initial consultation with our Wisconsin & Illinois construction attorneys.