December 2012

Labour and material payment bonds

By Sylvain Lallier

There are several guarantees and protection mechanisms available to construction industry stakeholders. Clients, general contractors, subcontractors and materials suppliers may take advantage of these guarantees.

Without a doubt, the legal construction hypothec is the tool that is most commonly used by construction creditors to recover sums due.

However, certain types of construction works such as roads and municipal buildings, for example, are not covered by legal construction hypothecs. It will therefore be necessary to determine another type of guarantee in order to recover any monetary claims.

Not only do clients use labour and material payment surety bonds (wages, materials and services) to ensure that subcontractors and suppliers are paid, they also require that general contractors provide such surety bonds from a bonding company in the tender documents.

Labour and material payment bonds guarantee that parties who enter into a contract with a principal (general contractor) will be paid for the hours worked and materials provided to carry out the project outlined in the bond.

On the whole, the bond will chiefly benefit a general contractor's subcontractors and suppliers.

Upon signing a contract with a general contractor, subcontractors and materials suppliers should request a copy of the bond for their own files in case of non-payment.

However, it is important to note that the terms and especially the deadlines set out in the bond must be very rigorously respected, otherwise the defaulting party will lose its right of direct recourse against the bonding company.

All too often, subcontractors are unaware of the bond. They should inquire as to its existence and especially as to the mechanism by which they may file a claim against the company in the event of non-payment by the general contractor.

Surety bond documents are easily accessible. It's simply a question of knowing where to look and who to ask.