PUBLIC PROJECT – PAYMENT BOND

RIGHT? – WRONG!

By Thomas R. Yocum, Esq.

Benjamin, Yocum & Heather, LLC

            From time to time, a client will tell me that the client is not worried about getting paid on a construction project, because it is a public project and there is a payment bond.  While this statement is usually true, on occasion, it may not be true, and the results can be devastating. 

            An unfortunate example is currently unfolding in connection with the Kenwood Towne Place Public Parking Garage under a contract with the Port of Greater Cincinnati Development Authority.  A payment bond was neither required by this public owner, nor posted by the prime contractor on this public project.

Unfortunately, many subcontractors have not been paid large amounts of money.  Liens have been filed against the funds payable to the principal contractor; however, the Port Authority has not yet determined whether sufficient funds are available to pay the lien claimants. 

While the general assumption is that Ohio law requires the posting of payment bonds on such public projects, the Port Authority, and its attorneys, have argued that there is an exception for a port authority constructing an economic development project, such as the Kenwood Public Parking Garage.

            If the funds held by the Port Authority are insufficient to pay subcontractors, many subcontractors could be facing very sizeable unpaid contract balances, and may have to resort to litigation in hopes of making recovery.

            Subcontractors and material suppliers should always obtain the notice of commencement for a public project to verify that a payment bond was posted by the principal contractor.  Just because a payment bond has been issued, subcontractors and material suppliers cannot necessarily assume that they are automatically protected.  First of all, they should verify that the bonding company is legitimate and solvent.  On occasion, sham bonding companies issue bonds that public authorities unwittingly accept.  Further, in these times of financial crisis, even those sureties/insurance companies who were deemed to be financially sound may in fact be facing solvency issues.

Finally, assuming that a payment bond has been issued by a legitimate, solvent surety company, the subcontractor or supplier must insure that it has followed the necessary procedures to protect its payment bond rights by timely giving a notice of furnishing and timely presenting the payment bond claim.  In Ohio, a subcontractor or material supplier who is not in direct privity with the principal contractor who supplies labor or materials that cost more than $30,000.00 must serve a notice of furnishing on the principal contractor within twenty-one days of first providing services or materials in order to fully preserve its payment bond claim rights.  The notice of payment bond claim must be given within ninety days after acceptance of the project. 

Now, more than ever, it is important to protect payment rights.  Subcontractors and suppliers are well advised to be proactive to verify the existence of payment bonds, and to be vigilant in timely taking the necessary steps to preserve payment bond claim rights.