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When Is a Payment Bond Claim a Better Choice than a Mechanics Lien?

When a supplier or subcontractor doesn’t get paid for materials or work on a construction project, they have two options for securing payment: a mechanics lien or payment bond claim. Both are tools for claiming what is owed in case of a dispute. Although they are similar, there are key differences that will determine which should be used in a particular situation.

Payment bond claim versus mechanics lien: What’s the difference?

A mechanics lien is a lien against the title of the property where work was performed. It provides incentive for property owners to ensure workers and suppliers get paid. A lien creates a security interest in the improved property for the amount owed.

Payment bonds, on the other hand, provide an underwritten payment guaranty per the terms of the construction contract. A bond claim brings in another party to help resolve issues — a surety bond company — who will work with the contractor to resolve issues. There are three parties involved in a payment bond: surety company, principal (e.g., general contractor), and obligee (e.g., subcontractor or supplier).

Mechanics Liens are typically used for private construction projects and offer strong protection for subcontractors and suppliers. Payment bonds are typically used for government projects, but also may be used on private construction projects where the property owner does not want to risk the property itself.

Filing a bond claim

Filing a payment bond claim is similar to filing a mechanics lien. It’s important to note, however, that each state may have varying rules and regulations when it comes to filing a payment bond claim. So, while the steps may be similar, the who, when, and how may change. Also, the rules for a mechanics lien within a particular state may not align perfectly with the rules for a payment bond, so be sure to review before proceeding.

The basic steps for filing a payment bond claim:

Step 1: Send a preliminary notice. This is required in many states, but the specific rules may vary. Verify the rules for preliminary notices in the project’s state to ensure proper notice has been provided.

If the debt remains unpaid after the notice has been provided, the claimant may file against the payment bond.

Step 2: Send a notice of intent. This basically says that you intend to file a claim against the bond if payment has not been received. It’s essentially a warning letter. Typically, this is sent to the General Contractor, as well as the surety company.

Step 3: Submit your bond claim. The when and how of submitting your bond claim varies by state, so it’s important to verify the process before proceeding. Overall, this process is a bit more complex than filing a mechanics lien in that you will likely need to send the claim via certified mail, with a return receipt requested. The required recipients will vary by state but will likely include the General Contractor, property owner or public authority, and surety company representative.

Step 4: Enforce bond claim in court. If the bond claim is rejected, ignored, or disputed, you may have to step into a courtroom to recover payment. If this happens, you will typically need to file a suit against the bond within one year. But again, always verify with the state-specific regulations to ensure compliance and expedited recovery.

Bonding off a mechanics lien

In some cases, a contractor or property owner may choose to purchase a payment bond after a mechanics lien has been filed against their property. As mentioned, when a mechanics lien is filed, it essentially places a lien against the property as leverage to recover payment. If payment is not made, the property owner may be forced to sell or foreclose on the property to make the required payment. In this case, the property owner may opt to purchase a payment bond instead. This would essentially remove the risk from the property from the debt owed, placing the onus on the payment bond to recover the debt. This process is called “Bonding off” a mechanics lien.

Both mechanics liens and payment bonds are valuable tools for recovering debt in the construction industry. Understanding when and how to use each tool can be confusing but important. Consult with a knowledgeable expert at Mountain States Commercial Credit Management to learn how to best use these tools to recover what is owed.