As many contractors know, the end of the year can often be the hardest time to collect payments in a timely manner. That’s why it’s important contractors are aware of their options including the option to claim against a labour and material (L&M) payment bond if one is in place.
Construction has its fair share of challenges and protecting your company’s rights in the case of non-payment is an area that deserves special attention and a defined internal process. In addition to lien rights, the L&M bond can be claimed against in the case of non-payment. The project owner will typically request an L&M bond from the prime contractor to provide protection that monies released to the prime contractor are in fact paid to the relevant subcontractors and suppliers. The L&M bond gives subcontractors and suppliers another remedy besides placing a lien against the project. This is especially important in the event that the prime contractor goes insolvent and hasn’t paid his subs and suppliers.
How does an L&M bond work?
The L&M bond provides protection against non-payment of services rendered as well as non-payment of holdback funds. With respect to holdback, a notice of claim must be received within 120 calendar days after the claimant should have been paid in full under its contract. With respect to amounts other than holdback, a notice of claim must be received within 120 calendar days after that date on which the claimant last performed labour or provided materials.
How do I make a claim?
Now that you understand the mechanics of the bond, there are critical steps one needs to take to make a valid claim.
The following is a list of best practices for all projects in anticipation of a potential non-payment event. These steps will prepare you to make an L&M bond claim should the need arise.
Hope for the best, plan for the worst.
- It is good practice to ask if there’s been a L&M bond provided on the project. If there is a bond, request a copy at the time the contract is awarded. The bond should be reviewed and filed appropriately. If all goes well and payments are made in a timely manner, you will not need to look at the bond again. If payments start to slow down, you may need to start considering taking steps to claim against it.
Matt Manol, surety manager at Trisura, has this to say about whether or not you are a party to the bond and would qualify: “Obtain and read a copy of the executed L&M bond prior to contract execution to know if you are a claimant covered by the bond. Some of the older L&M bond wordings that continue to be used provide coverage for those claimants such as subtrades, suppliers, labour and unions who had direct contracts with the named contractor/principal on the bond assuming the claims are made in the requisite time.”
In recent years, the prevalence of what the surety industry refers to as “broad form wording” for L&M bonds has grown. Common L&M bond forms, such as prescribed form 31 under Ontario’s Construction Act, or the Defense Construction Canada form, are common broad form L&M bond wordings.
These enhanced wordings expand the definition of a claimant and typically provides for relief for those that have provided materials and services to the project, but do not have a direct contract with the contractor named on the bond but sometimes on a limited basis.
- As mentioned above, 120 days is the magic number for L&M bonds. A claim has to made against a holdback within 120 days from when funds were to be received, and/or within 120 days of your last invoice or date of services rendered, or the last day you were onsite. It is crucial that a contractor is able to provide evidence as to when labour was last performed or materials last provided on their projects.
- A “notice of claim” must be sent to the bond company, the prime contractor and the owner. The notice of claim is a document that outlines all of the particulars relevant to your claim under the L&M bond. It includes the parties involved, the details of the project in question, the amounts that are being claimed as well as the documents that are included in your claim submission. It lays out the dates during which services were supplied and should clearly outline your position so that it’s easy for the bond company’s claims department to understand. It is important to remember that the notice of claim must be sent by way of registered mail to the general contractor, the owner as well as the bond company. A notice of claim template can be sourced from your surety bond broker.
- The claim must be substantiated by your records. This step is likely the most critical. You will need to include the following with your notice of claim.
– Copy of the written contract
– Copies of all invoices
– Proof of payment received
– The exact amount outstanding including HST
– Copy of the labour and material bond
Vic Bandiera, senior vice-president of underwriting and construction services at Trisura, offered the following advice when making a claim.
“It’s best to send the executed contract and all approved change orders. Also, send a statement of account showing the adjusted contract price (contract price with all approved change orders) and listing of all invoices and payments to show outstanding balance for this project. Send the written claims notice by fax or registered mail or courier with proof of delivery. If sent by email ensure you follow up with mail or courier to be able to show proof of delivery. Do not wait until the last day.”
Ultimately, when placing a claim against an L&M bond, a contractor has to weigh the benefit against any potential damage it may do to that particular business relationship. Regardless, it is important for contractors to be clear on the timelines and information required to ensure they are placing a valid claim against an L&M bond. At the end of the day, consider it another tool in the tool box.
Andrew Cartwright is the vice-president of surety for FCA Insurance. With over 10 years of experience as an RVP of a large national surety company, Cartwright uses his expertise to help FCAs clients manage and build their surety capacity. Chris Dardarian is a surety bond broker at FCA Insurance. He has been in the industry for 15 years working as both a surety bond underwriter and a broker in Ontario and Quebec. Dardarian has helped numerous growing contractors access higher surety capacity to meet their goals.
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