Construction Bonds

What are Construction Bonds?

Construction bonds are generally securities that are governed by law and / or by their written terms and that are obtained by principals (usually a prime contractor) and set forth legal obligations of a surety (essentially an insurer with sufficient financial backing) towards an obligee (usually the owner of the property). There are many types of construction bonds—all offering different obligations and governed by different laws and procedures.

A performance bond is a bond that obligates the surety to ensure or pay for the performance of the principal in the event the principal defaults on its contractual obligations. A performance bond is required for most public sector projects in order to protect the public from the potential harm of a contractor furnishing defective or incomplete work.

A payment bond is more commonly the subject of a dispute. Payment bonds obligate the surety to pay lower-tier vendors (usually subcontractors and suppliers) in the event the principal fails or refuses to pay. Payment bonds are usually meant to replace the process of vendors filing claims of lien against the property—instead of filing a lien to secure payment, lienors must go after the payment bond. This generally protects the owner and the property from claims and burdens by subcontractors and suppliers, while still giving subcontractors and suppliers reassurance of payment.

Florida Law and Construction Bonds

Payment bonds for prime contractors on private projects are governed by Section 713.23, Florida Statutes. Additionally (and more frequently of late), private payment bonds are being issued as “conditional” payment bonds under Section 713.245, Florida Statutes, which are designed to allow sureties to benefit from pay-when-paid or pay-if-paid clauses, but in turn afford less protection to the owner’s property, which may still be subject to claims of lien. For public projects (where a payment bond is almost always required), payment bonds for prime contractors are governed by Section 255.05, Florida Statutes for state projects (the “Little Miller Act”) and 40 USCS Section 3131 for federal projects (the “Miller Act”). Finally, if a payment bond does not meet the requirements of the above-referenced statutes (such as it is issued by a subcontractor instead of a prime contractor, or it offers more protection than required by law), it will usually be deemed a “common law” payment bond, and will be governed primarily by its written terms instead of law.

Because of the many different requirements that govern the different types of payment bonds, it is important to know—at the beginning of a bonded project—exactly what you need to do to perfect your bond rights. Claims against statutory payment bonds are required to be brought within 1 year of the last day the claimant performed work, while claims against common law payment bonds have a statute of limitations of 5 years.

In some circumstances, some types of payment bonds require you to serve a Notice to Contractor within 45 days of starting work and / or a Notice of Nonpayment within 90 days of  finishing  work in order to preserve your rights against the payment bond (much like the Notice to Owner and Claim of Lien for non-bonded projects).

Lien Transfer Bonds

Additionally, if a claim of lien is filed on a property, the lien may be transferred to a bond (sometimes called a “lien transfer bond” and governed by Section 713.24, Florida Statutes), which means that the property is cleared of the burden of the lien, and the lienor may then proceed with its claim against the surety. This is most often used when a prime contractor and subcontractor or supplier cannot resolve a payment dispute. In such a case, the prime contractor (usually under pressure from the owner) procures the lien transfer bond, resolving a potential dispute with the owner and maintaining its rights to defend against the subcontractor’s or supplier’s claim.