Construction bonds are a tool that can be used to protect owners and those supplying labor and materials on a construction project. Though common on projects completed for government entities, construction bonds can also be used on private projects. Despite construction bonds being a staple of the construction industry, for those who do not regularly deal with construction bonds, understanding how the bond works can be a source of anxiety and uncertainty for those involved in the project. As a result, this article aims to dispel some of the mystery surrounding construction bonds by addressing the basics of Nebraska law governing construction bonds.

1. What is a construction bond?

A construction bond is effectively an insurance policy on a construction project to ensure that the project is completed and all work covered by the bond is paid for. When a construction bond has been obtained for a project, a claim on a construction bond takes the place of allowing a contractor to record a lien against the real estate where the project is located. Construction bonds can be broken down into two primary types of bonds: performance bonds and payment bonds. Performance bonds are used to protect a project owner as an agreement from the issuing surety to step in and arrange to complete the construction project if the prime contractor fails to do so. A payment bond serves as a means of ensuring that all parties that provided labor or materials on a project are paid for the labor and materials provided, even if the owner or prime contractor fails to make these payments. It is possible to have both a performance and payment bond in place on a single project.

2. When is a construction bond required?

Construction bonds are required by Nebraska law when a contractor agrees to perform construction work on a public building, bridge, highway, or any other public structure for the State of Nebraska or any city, village, school district, or other Nebraska public entity. Stated more simply, construction bonds are required when entering into a construction agreement with state or local government in Nebraska. However, construction bonds are not required when contracting with the State of Nebraska on a project that will cost no more than $15,000 in total or when contracting with local government in Nebraska (a county board, city, village, school district, etc.) on a project that will cost no more than $10,000 in total. On a public construction project in Nebraska, coverage must be, at the very least, up to the amount of the prime contractor contract on the project. In contrast, construction bonds are sometimes used, but generally are not required, on construction projects where the work is to be performed on privately owned property in Nebraska.

3. Who can make a claim on a payment bond?

On a public project in Nebraska, contractors, suppliers, or others who provide materials or labor on a project can make a claim on an applicable bond as these rights are controlled by statute. Conversely, if a construction bond is obtained by a general contractor on a private project, the terms of that specific bond will determine what parties are able to make a claim on the bond. If a party is not covered by the bond they cannot make a claim on it.

4. When can a claim on a payment bond be made?

On a public construction project in Nebraska, a claim can be made 91 days after the last labor was performed or material supplied on the project for which the claim is being made. Additionally, a lawsuit on a bond must be filed no more than one year after “final settlement” of the government’s contract with the prime contractor, meaning the point in time that the officer or department in charge of the construction contract has determined the entire project has been completed and final payment should be issued on the project.

On a private construction project, the terms of the bond determine when a claim on a bond can be made. As a result, it is best to scrutinize the terms of the bond at issue to determine when claims can and cannot be made on the bond.

5. What are the requirements to make a claim on a payment bond?

On a public construction project in Nebraska, the requirements for making a bond claim depend on whether the claiming party has a contract with the contractor that obtained the bond for the project. A party that has a contract with the contractor that obtained the bond may simply file a lawsuit or make a written demand on the bonding company as long as the claimant has complied with the timing requirements discussed above. In contrast, a party that does not have a contract directly with the contractor that obtained the bond, such as a party that has a contract with a subcontractor on the project, must provide notice to the prime contractor within four months from the date that labor was performed or materials were supplied. This notice will need to be in writing, state the amount that is unpaid, and the name of the party the work was performed for. Additionally, this notice must be mailed by registered or certified mail to the prime contractor at any place the general or prime contractor maintains an office or conducts business.

On a private construction project, the terms of the bond govern how notice should be provided, what information must be included, and what method must be used to make a valid claim on a bond.

6. How to get a copy of the payment bond.

On a public project, a copy of the bond can generally be obtained by making a request to the state or local entity who awarded the contract. Additionally, a copy of the bond can often be obtained from the contractor that secured the bond for the project, regardless of whether it is a public project or a private project. If there are concerns at the outset of a project that receiving timely payment may be an issue, it can make sense to request a copy of the payment bond before beginning work so decisions on the project can be made in light of the specific the terms of the payment bond at issue.

Conclusion

Though this article discusses several general questions pertaining to bonds on construction projects, there are many nuances associated with making a bond claim and an improper claim can result in forfeiting your right to be paid under the bond. As a result, if you have any additional questions or concerns associated with a construction bond, please do not hesitate to contact one of the attorneys in our Construction Industry and Litigation Practice Area.

_{This content is made available for educational purposes only and to give you general information and a general understanding of the law, not to provide specific legal advice. By using this content, you understand there is no attorney-client relationship between you and the publisher. The content should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.}