Construction Surety Bonds

Sureties are a specialized segment of the insurance industry. A Surety Bond differs from insurance in very significant ways. A Surety Bond is an agreement between three parties: Principal, Surety and Obligee.

  1. Principal – the party who is required to post a bond;
  2. Obligee – the party who is requiring that the principal post a bond (i.e. a government entity or an owner/real property developer);
  3. Surety: the party who provide a financial guarantee to the Obligee on behalf of the Principal

In the construction industry, Surety Bonds insure that a contractor will fulfill their obligations specified in a signed construction contract, subject to a variety of exceptions and conditions. The most common forms of surety bonds used in the construction industry are Payment Bonds and Performance Bonds.

Payment Bonds

Payment Bonds guarantee the satisfactory performance of all the contractors duties specified in a construction contract. Payment Bonds assure the Owner (the Obligee) that that labor, material and sub-contractor costs on a construction job will be paid. This assurance is for the use and benefit of all laborers, material suppliers, and subcontractors who are eligible by contract or statute for the protection afforded by the payment bonds. They can also act as a way to protect the project from liens.

There are no lien rights in Florida when work is performed on publicly owned property. See Fla. Stat. §255.05. Section 255.05 is known as Florida’s “Little Miller Act”. It so called because the statute is modeled after a federal statute, 40 U.S.C. §270 known as the “Miller Act”. The purpose of Florida’s Little Miller Act is to protect subcontractors, material suppliers and laborers by providing an alternative remedy to mechanic’s lien on public projects. Florida’s Little Miller Act requires a person entering into a contract with the state or any county, city, or other political subdivision or public authority in excess of $100,000 for the repair or construction of a public facility to provide a payment and performance bond. The requirement may be waived by a local government for a contract in an amount of $200,000 or less. Accordingly, a potential lienors (sub-contractors, material suppliers and laborers) have the right to look to a Section 255.05 public payment bond for payment. Under section 255.05, the claimant typically has to abide by some very stringent conditions precedent and notice requirements and is only afforded a relatively small window of time to bring their claim. Therefore, it is important to discuss these issues with a Florida construction lawyer who is knowledgeable in these areas and can guide you in the right direction.

Performance Bond Claims

The performance bond’s purpose is to guarantee a contractor’s performance of a construction contract. There are numerous ways an owner can make a claim on a performance bond. For example, if a contractor goes bankrupt during construction and fails to complete a project, the owner can assert a claim against the bond. Also, if a contractor defaults on the contract and is subsequently terminated, the owner can assert a claim against the bond. Most common is a situation where there are alleged construction defects, particularly latent defects (a defect that could not be discovered by a reasonably thorough inspection). In these situations, an owner can assert a claim against the bond.

Presumably, the advantage of a performance bonds is that the contract’s performance is guaranteed by a solvent surety (insurance company). These claims are subject to a five-year statute of limitations. In Federal Ins. Co. v. Southwest Retirement Center, Inc., the Florida Supreme Court held that the statute of limitations on a performance bond in a case involving latent defects accrues (begins to run) “on the date of acceptance of the project as having been completed according to terms and conditions set out in the construction contract.” 707 So. 2d 1119, 1121 (Fla. 1998. Therefore, the statute of limitations begins to run on this date and expires after five years, irrespective of when the defect was discovered. Accordingly, when and whether the statute of limitations accrues (begins to run) on a performance bond claim involves a factual analysis and a thorough review of the construction contract. It is important to discuss these issues with a Florida construction lawyer who is knowledgeable in these areas and can guide you in the right direction.

Call JP Salas Law at 954-315-1115, if you are an owner, developer contractor, subcontractor or supplier involved in a public or private construction project, and would like to know more about your rights and/or obligations under a payment or performance bond.