Texas Construction Bond Claims: Performance Bonds and Payment Bonds on Private and Public Projects

Payment and performance disputes are common on Texas construction projects. When a contractor fails to perform, abandons the job, causes delays, performs defective work, or fails to pay subcontractors and suppliers, the parties involved may need to look beyond the construction contract itself.

In many cases, the most important source of protection is a construction bond.

Performance bonds and payment bonds serve different purposes. A performance bond generally protects the project owner if the prime contractor fails to complete or properly perform the work. A payment bond generally protects unpaid subcontractors, suppliers, and laborers by creating another source of recovery for amounts owed.

The rules for asserting bond claims depend on whether the project is private or public. Private project bonds and public project bonds are governed by different laws, deadlines, and notice requirements.

What Is a Performance Bond?

A performance bond is intended to guarantee the prime contractor’s performance under the construction contract.

If the prime contractor cannot meet its contractual obligations because of delay, defective work, inability to complete the project, abandonment, or bankruptcy, the project owner may be able to assert a claim against the performance bond.

On a valid claim, the surety may be required to step in and address the contractor’s failure. Depending on the bond language and circumstances, the surety may respond by:

1. Providing additional financing so the contractor can complete the work;

2. Hiring a replacement contractor;

3. Allowing the owner to hire a replacement contractor; or

4. Paying certain cost overruns covered by the bond.

   
   

Performance bond claims are highly dependent on the language of the bond itself. Before terminating a contractor or making a demand on the surety, a project owner should carefully review the bond and construction contract.

What Is a Payment Bond?

A payment bond is intended to protect subcontractors, suppliers, laborers, and others who provide labor or materials to a construction project.

If the contractor who hired them does not pay, a properly perfected payment bond claim may allow the unpaid claimant to seek recovery from the surety. This gives the claimant an additional source of payment beyond a standard breach of contract claim against the party who failed to pay.

Payment bond claims are especially important on public projects because unpaid contractors and suppliers generally cannot file mechanic’s liens against public property.

Private Project Performance Bonds in Texas

On large privately owned construction projects, property owners often require the prime contractor to purchase a performance bond from a surety.

Unlike certain payment bond requirements, private performance bonds are generally contractual. That means the owner must carefully follow the specific procedures stated in the bond.

Those procedures often include:

1. Providing notice of default to the prime contractor;

2. Terminating the prime contractor for cause, if required and appropriate;

3. Notifying the surety of the claim;

4. Tendering the remaining contract balance to the surety; and

5. Allowing the surety to exercise its rights under the bond.

   
   

Because a wrongful termination or improper notice can create significant problems, owners should not assume they can immediately terminate the contractor and demand payment from the surety. The contract and bond language matter.

Private Project Payment Bonds in Texas

Private payment bonds are different from private performance bonds. Private payment bonds are governed by Texas Property Code Chapter 53 and are designed to protect unpaid subcontractors and suppliers while also protecting the property from mechanic’s liens.

A valid private payment bond generally must:

1. Be in the penal sum of the prime contract amount;

2. Be in favor of the property owner;

3. Be endorsed by the surety, property owner, and prime contractor;

4. Be conditioned on prompt payment of claims; and

5. Include the surety’s contact information.

   
   

To bar mechanic’s liens against the property, the payment bond and prime contract generally must be recorded in the real property records.

How an Unpaid Claimant Asserts a Claim Against a Private Payment Bond

An unpaid subcontractor or supplier may assert a claim against a private payment bond by properly following the requirements of Texas Property Code Chapter 53.

Depending on the circumstances, this may involve:

1. Timely serving required pre-lien notices;

2. Recording a lien affidavit against the property; or

3. Timely delivering a statutory notice of claim to the surety and original contractor.

   
   

For unpaid progress payments, the relevant notice is generally a Chapter 53 notice of claim for unpaid labor or materials. For contractual retainage, a claimant may need to provide a separate retainage notice or include the required retainage information in another timely notice.

Because private payment bond claims are tied closely to Texas mechanic’s lien procedures, claimants should treat these deadlines seriously.

Filing Suit on a Private Payment Bond Claim

If a private payment bond claim remains unpaid after it has been perfected, the claimant may file suit on the bond.

A claimant generally may file suit if the claim remains unpaid for 60 days after perfection of the claim. The lawsuit must be filed in the county where the improved property is located.

The claimant may sue the principal and the surety, jointly or separately, to recover the amount owed and court costs. In certain proceedings to enforce a statutory bond claim, the court may also award reasonable attorney’s fees and costs if equitable and just.

If multiple valid claims exceed the penal sum of the bond, claimants may be limited to a pro rata share of the bond amount. In most cases, the surety’s liability is limited to the penal sum of the bond.

Limitations Periods for Private Payment Bond Claims

The deadline to file suit on a private payment bond claim depends on when the bond was recorded.

If the bond was already on record when the claimant filed its lien affidavit, suit generally must be filed within one year after the claimant perfected its claim.

If the bond was filed after the claimant filed its lien affidavit, suit generally must be filed within two years after perfection of the claim.

A party’s failure to produce a copy of the statutory bond when requested does not automatically extend the claimant’s deadline to sue on the bond.

Public Project Bond Claims in Texas

Public construction projects make up a significant portion of construction activity in Texas. These projects may involve state highways, public buildings, schools, county courthouses, jails, hospitals, libraries, parks, and other government-owned property.

Unlike private property, public property is generally protected from mechanic’s lien claims and lien foreclosure actions. This is because governmental entities and public projects are protected by sovereign and governmental immunity.

As a result, unpaid subcontractors, suppliers, and laborers on public projects generally cannot file a mechanic’s lien against the property. Instead, they must look to the payment bond.

Public Performance Bonds

Under Texas Government Code Chapter 2253, a governmental entity that enters into a public work contract with a prime contractor generally must require a performance bond if the contract amount exceeds $100,000.

A public performance bond is for the protection of the governmental entity awarding the contract. It generally must:

1. Be solely for the protection of the state or governmental entity;

2. Be in the amount of the prime contract; and

3. Be conditioned on faithful performance of the work according to the plans, specifications, and contract documents.

   
   

Public performance bonds protect the governmental owner, not unpaid subcontractors or suppliers.

Public Payment Bonds

Public payment bonds are required on many public projects for the protection of unpaid subcontractors, suppliers, and laborers.

Under Texas Government Code Chapter 2253, a governmental entity generally must require a payment bond when the prime contract exceeds:

1. $25,000 for most public work contracts; or

2. $50,000 when the contract is with a municipality or joint airport board.

   
   

The payment bond acts as a substitute for mechanic’s lien rights. If a subcontractor or supplier is not paid, a properly perfected bond claim may allow that claimant to seek payment from the surety.

Why Public Payment Bond Claims Matter

A public payment bond claim creates an additional source of potential recovery.

Without a bond claim, an unpaid subcontractor or supplier may only have a breach of contract claim against the party who hired them. With a properly perfected bond claim, the claimant may also seek payment from the surety.

How to Perfect a Public Payment Bond Claim

To perfect a public payment bond claim for unpaid labor or materials, a claimant generally must send a notice of claim with a sworn statement of account to the surety and the prime contractor.

The claimant will usually need the surety’s name, address, and bond number. This information can often be obtained from the governmental entity or prime contractor.

The notice must generally be sent on or before the 15th day of the third month after each month in which labor was performed or materials were delivered.

The exact contents of the notice can vary depending on whether the work was performed under a written or verbal agreement and whether the claim involves unpaid progress payments, retainage, or specially fabricated materials.

First-Tier Subcontractors and Suppliers

A first-tier subcontractor or supplier is hired directly by the prime contractor.

If a first-tier claimant has not been paid, it generally must serve the surety and prime contractor with a third-month notice of claim and sworn statement of account.

This notice is generally due by the 15th day of the third month after each month in which unpaid labor or materials were provided.

Second-Tier Subcontractors and Suppliers

A second-tier subcontractor or supplier is hired by a subcontractor, not by the prime contractor.

Second-tier claimants generally have additional notice requirements.

First, they must serve a second-month notice of claim on the prime contractor by the 15th day of the second month after each month in which unpaid labor or materials were provided.

Second, they must serve the third-month notice of claim and sworn statement of account on the surety and prime contractor by the 15th day of the third month after each month in which unpaid labor or materials were provided.

In some cases, notices may be combined, but they must still be sent by the earliest applicable deadline.

Public Project Retainage Claims

Retainage claims have their own notice requirements.

To perfect a claim for unpaid retainage, a claimant is generally required to send a notice of claim to the surety and prime contractor within 90 days from completion of the public work contract.

For claimants who were hired by a subcontractor and whose subcontract allows retainage to be withheld, an additional notice may be required. The claimant generally must notify the prime contractor of the retainage agreement by the 15th day of the second month after the claimant first provides labor or materials to the project.

That notice should state that the subcontract provides for retainage and generally identify the nature of the retainage, such as the percentage being withheld from progress payments.

Specially Fabricated Materials

Specially fabricated materials can also trigger specific notice requirements.

If a claimant accepts an order for specially fabricated materials from someone other than the prime contractor, the claimant generally must notify the prime contractor in writing that the order has been received and accepted.

This notice must generally be sent by the 15th day of the second month after the order is received and accepted.

Public Bond Claim Deadlines Are Strict

Public bond claim deadlines are unforgiving.

Courts typically require strict compliance with Texas Government Code Chapter 2253 notice deadlines. Unlike certain deadlines under Texas Property Code Chapter 53, Chapter 2253 notice deadlines are not extended simply because they fall on a Saturday, Sunday, or legal holiday.

This makes it especially important for unpaid claimants to calculate deadlines early and send notices before the last day.

Filing Suit on a Public Payment Bond Claim

If a public payment bond claim remains unpaid, the claimant may file suit against the surety and prime contractor.

A lawsuit may generally be filed after 61 days have passed from the date the notice of claim was mailed.

However, the lawsuit must be filed no later than one year from the date the claimant timely made the claim. If suit is not filed within that one-year period, the claim may be waived.

Key Differences Between Private and Public Bond Claims

Private and public bond claims serve similar purposes, but the rules are different.

On private projects, payment bond claims are closely tied to Texas mechanic’s lien procedures under Texas Property Code Chapter 53. On public projects, payment bond claims are governed by Texas Government Code Chapter 2253 because mechanic’s liens generally cannot be filed against public property.

Private performance bonds are primarily governed by the contract and bond language. Public performance bonds are required by statute on qualifying public works contracts and protect the governmental entity.

For unpaid subcontractors and suppliers, the most important distinction is that public payment bonds often function as the primary substitute for lien rights.

Need Help with a Texas Construction Bond Claim?

Construction bond claims are technical and deadline-sensitive. Whether the project is private or public, missing a required notice or filing deadline can affect your ability to recover payment.

Verplank Iorio PLLC assists contractors, subcontractors, suppliers, owners, and other construction professionals with payment disputes, mechanic’s liens, and bond claims across Texas.

If you are dealing with nonpayment, contractor default, defective work, project delay, or a potential bond claim, contact Verplank Iorio PLLC to discuss your options.