What the Changes to the Public Project Payment Bond Laws Mean For General Contractors & Subcontractors

Most of the attention surrounding the recent changes to North Carolina’s lien laws has been focused on the new lien agent requirements that apply to most private projects commenced on or after April 1, 2013. However, the legislature has also made significant changes to the payment bond provisions applicable to contracts awarded by North Carolina public bodies. These new provisions became effective January 1, 2013. They are primarily intended to address the “double payment problem” that often arises on public projects when remote subcontractors or suppliers make claims against the general contractor’s payment bond. The bonding company typically pays the claim and then seeks reimbursement from the contractor, who may have paid its subcontractor unaware of the amounts owed to a lower-tier subcontractor.

The new payment bond requirements primarily affect general contractors and subcontractors (and not owners). This alert provides a quick synopsis of the new requirements.

On public projects requiring a payment bond, the amended laws require:

• Contractor’s Project Statement.
  • General contractors must provide a “Contractor’s Project Statement” to their direct (i.e., first-tier) subcontractors. The Contractor’s Project Statement must contain the following information:
    • The name of the project
    • The physical address of the project
    • The name of the public agency with which the general contractor has an agreement
    • The name of the general contractor
    • The name, phone number, and mailing address of an agent authorized by the general contractor to accept service of any requests for payment bond, notices of public subcontract, and notices of claim on payment bond.
    • The name and address of the principal place of business of the surety issuing the payment bond.
  • Subcontractors (including first-tier and lower-tier subcontractors) must provide the Contractor’s Project Statement to their direct subcontractors.

Critically, subcontract agreements are unenforceable against the lower-tier subcontractor until the Contractor’s Project Statement has been provided in accordance with these provisions.

• Notice of Public Subcontract. All subcontractors (except first-tier subcontractors) must serve on the general contractor a “Notice of Public Subcontract” in the form provided by the statute (N.C. Gen. Stat. § 44A-27(d)). It is advisable to serve this notice as soon as the subcontractor becomes involved with a project; otherwise, the subcontractor could forfeit at least some of its rights to recover against a payment bond. This requirement applies to claims against the payment bond in the amount of $20,000 or more or claims for amounts becoming due more than 75 days before the notice is given; accordingly, a subcontractor is well advised to file the Notice of Public Subcontract anytime its total contract value is expected to exceed $20,000.
• Request for Payment Bond. Second-tier and lower-tier subcontractors have the right to request a copy of the payment bond from the general contractor. Upon request, general contractors must furnish a copy of the payment bond within 7 calendar days. If the general contractor complies with this provision, a potential claimant cannot recover for labor or materials it provided more than 75 days before the potential claimant served its Notice of Public Subcontract on the general contractor.
• Claim on Payment Bond. The new requirement for a Notice of Public Subcontract is in addition to the requirement under the old law that a second-tier or lower-tier subcontractor must give written notice of a “Claim on Payment Bond” to the general contractor within 120 days of the last furnishing of labor or materials for which payment is sought. If this notice of claim on payment bond is not given, the subcontractor loses its right to file a lawsuit against the bonding company to recover under the payment bond.
• Methods of Notice. All notices, claims and requests related to the payment bond may now be served by either certified mail or by signature confirmation provided by the US Postal Service. Notices, claims and requests should be sent either to the general contractor’s office or the agent identified in the Contractor’s Project Statement.

As is the case with the recently enacted lien agent laws, the changes to the public project payment bond statutes add new procedural requirements, which were already highly technical. General contractors seeking to avoid “double payment” and subcontractors (including suppliers) seeking to preserve their rights to recover on the payment bond should seek counsel from competent construction lawyers to ensure full compliance with these important changes.