Bid, performance and payment bonds and what each secures, the federal statute governing bonds on public work and its state equivalents, who counts as a claimant at each tier, the notice a remote claimant must give and the deadline that follows, proving the claim, the surety's defenses and its right of indemnity from the contractor, and joint check arrangements.
A payment bond claimant must prove that it furnished labor or material, that the labor or material was furnished in carrying out the bonded contract, the reasonable value or agreed price of what was furnished, and the balance unpaid after all credits. Each element is established from ordinary project records rather than from correspondence. A claim presented as a reconciled account with supporting documents is evaluated on the merits; one presented as a demand figure is not.
A surety defending a payment bond claim asserts, in sequence, that the claimant is outside the protected class, that the statutory notice was defective or late, that the action was untimely, that the claim was released or already paid, that the amount is wrong, and that the penal sum is exhausted. It may also assert the defenses the principal itself would have against the underlying obligation. Statutory waiver restrictions limit the release defense on required bonds.
A surety that pays under a bond has a right to recover from its principal, arising both from the general law of suretyship and from the general indemnity agreement executed before the bond issued. The agreement typically extends to losses, costs and fees, permits the surety to settle claims at its discretion, requires collateral on demand once exposure appears, and binds affiliated companies and individual owners personally. Its reach is far wider than the common law right alone.
A payment bond protects persons who furnished labor or material in carrying out the bonded work, but the class is limited by contractual distance from the prime contractor. Persons in privity with the prime form the first tier and generally need give no notice. Persons in privity with a subcontractor form the second tier and must give notice. Suppliers to suppliers usually fall outside the class entirely, and whether a party is a subcontractor or a supplier decides the tier.
Federal law requires a performance bond and a payment bond before award of a contract exceeding the statutory threshold for construction, alteration or repair of a federal public building or public work. The regulation implements the requirement at an adjusted threshold and prescribes alternative payment protections for smaller contracts. The payment bond exists because no lien may attach to federal property, and it protects persons supplying labor and material in carrying out the work.
Under the federal statute a person in a direct contractual relationship with a subcontractor, but none with the prime contractor, may sue on the payment bond only after giving written notice to the prime within ninety days of last furnishing. The notice must state with substantial accuracy the amount claimed and the party to whom the material was furnished or for whom the labor was performed, and must be served by a method giving third-party verification of delivery.
A joint check is an instrument payable to two or more payees together, which under the negotiable instruments rules may be negotiated, discharged or enforced only by all of them. Where a supplier endorses such a check, many jurisdictions apply a presumption that the supplier received the amount owed on that project, whatever the internal allocation between the payees. The presumption is rebuttable in some states and close to conclusive in others.
An action on a federal payment bond must be brought no later than one year after the day the claimant last performed labor or supplied material. The period runs from the claimant's own performance rather than from completion of the project, from the invoice date or from the failure of negotiations. It is not extended by partial payment, by continuing discussions or by the surety's investigation, and the action must be brought in the district where the contract was to be performed.
State public work bond statutes, commonly called little Miller Acts, require payment and performance security on state and local construction. They vary from the federal scheme in the contract value that triggers bonding, the amount of the bond, which claimants must give notice, what the notice must contain, how it must be served and the period within which suit must be brought. Some also require notice from claimants who would owe none under the federal statute.
A performance bond obliges the surety to answer for the principal's failure to complete the contract. The obligation is triggered by the obligee's declaration of default and termination, made in accordance with the contract and the bond's own conditions. The surety may then complete through a takeover agreement, arrange a completion contractor, tender funds, or deny liability. Each option carries different exposure, and a mishandled declaration can defeat the claim.
A bid bond secures the bidder's obligation to enter the contract and furnish the required bonds if awarded. A performance bond secures completion of the work for the benefit of the owner. A payment bond secures payment to those supplying labor and material, and is the only one of the three on which a subcontractor or supplier may normally claim. All three are three-party undertakings among principal, surety and obligee, and each is limited by its own penal sum.
