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An Owner Filed a Claim Against Your Performance Bond. Here’s What You Should Do Next

Performance bonds are commonplace in the construction industry. In fact, the Miller Act mandates that performance bonds be utilized for all federal construction projects valued in excess of $100,000. In addition, many states have laws known as “Little Miller Acts” which dictate mandatory performance bonds on the state level. Accountability is vital in the construction industry, and performance bonds are highly effective for ensuring that projects are completed according to the pre-approved specifications.

Anytime you plan to take on a new project, you should be prepared to secure performance bonds (and payment bonds). By doing so, you’re guaranteeing that the project will be completed according to the terms and conditions of the contract. Furthermore, it gives the owner peace of mind about their investment. It may seem like performance bonds transfer all the risk to the contractor, but in actuality, they’re simply reaffirming that you stand by your work. Unfortunately, dealing with performance bonds can become more complex when an owner attempts to file a claim.

In this article, a Tallahassee construction lawyer from Cotney Construction Law will discuss what you should do when an owner files a claim against your performance bond. Remember, failure to appease a performance bond will leave you indebted to the surety company from which you procured the bond. If this happens to you, it’s imperative that you consult a Tallahassee construction lawyer immediately to ensure your next steps are perfectly executed.

What Is a Claim Against a Performance Bond?

When an owner makes a claim against your performance bond, they are alleging that you either failed to complete the project or failed to uphold the quality of construction suggested by the contract. Basically, this type of claim signals that you underperformed; however, this doesn’t necessarily mean that your bond is void. A valid claim is dependent on several factors, and the burden of proof rests on the owner’s shoulders. In other words, the owner can’t invent reasons to invalidate your performance bond, they need bonafide proof. If an owner informs you that they plan to file a claim against your performance bond, consult a Tallahassee construction dispute attorney to see whether or not you should attempt to persuade the owner to handle the ordeal privately. If they are open to the idea of alternative dispute resolution, such as arbitration or mediation, you can avoid a significant headache. 

Here’s What Can Happen 

Aside from handling the issue in private beforehand, there’s not much a contractor can do once a claim has been filed against a performance bond. Truthfully, the ball is in the bonding company’s court, but it’s still important to understand what can happen when an owner files a claim against your performance bond. Here are the four potential outcomes:

  1. The surety company can simply cut the check and clean their hands of the situation. If this is the best course of action, the owner will be awarded the value of the contract minus the value of completed work. If this value isn’t sufficient to complete the project, the owner is responsible for gathering the necessary funds to bring the project to completion. Since this doesn’t always work out in the owner’s favor, they may be incentivized to work with you and a Tallahassee construction mediation attorney directly to come up with a better plan. 
  2. The surety company can deny the claim. In order to do so, they will have to determine that the owner has terminated the contractor without substantial evidence of a performance-related issue. Once again, the owner will be responsible for finishing the project, which often results in cost overruns. If cost overruns create financial setbacks for the owner, there’s a good chance that you’ll end up in court alongside your Tallahassee construction lawyer. Once litigation proceedings begin, the court is responsible for determining whether or not the contractor met their obligations. If they did, the owner isn’t owed anything; however, if they didn’t, the court will determine how much the owner is owed. 
  3. The surety company can hire the contractor back and help them complete the project. The owner wants the job done right, and nobody has more insight into the particulars of a project than the contractor that was originally hired to work on it. That said, this option is entirely dependent on the contractor. If they are unable to complete the project, even with additional funding, then this option won’t be suitable. The surety company is less likely to pursue this course of action if a financial loss is imminent, which means the contractor may be asked to cover potential losses with new collateral to safeguard the financial interests of the surety. It might seem counterintuitive to hire the same contractor twice to complete a project they already failed on, but courts have ruled that the surety is responsible for getting the job done. How this is accomplished is entirely up to them. 
  4. The surety company can find a different contractor to complete the job. This happened to a contractor in Florida in 2019 who was contracted to work on four different highway projects for the Florida Department of Transportation. They couldn’t get the job done, and other contractors have since replaced them. Surprisingly, transferring a project to a new contractor can be one of the least complex options for a surety company, especially if they already have strong relationships with dependable contractors. 

If you would like to speak with one of our Tallahassee construction lawyers, please contact us today.

Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.