Payment Bond Protections Under Attack in Ohio

Kegler Brown Construction Alert

Ohio (as with most states) has traditionally insisted that all public projects have a 100% performance and payment bond guaranteeing payment to subcontractors and suppliers. For decades, subcontractors and suppliers provided competitive pricing on public projects knowing that there would be adequate security to ensure payment. Recent developments have threatened that security at a time when subcontractors and suppliers need it most.

Payment bond protections have been threatened on three (3) fronts. First, many Ohio public projects are being performed by Port Authorities, and several of them, including a highly publicized fiasco involving the Kenwood Place parking garage, have failed or refused to require a payment bond, as is the custom with other public owners. It remains to be seen whether the unpaid subcontractors and suppliers on the Kenwood job will be able to recover against the parties who failed to require a bond. Subs and suppliers should pay particular attention to Port Authority projects around the State to determine whether a payment bond exists, and if not, whether they want to extend credit to that project.

Second, the recent “budget bill” (HB 1) passed with a special interest amendment “tagged on” that eliminates performance and payment bond rights on certain projects. Under the State's new "Unbonded Contractor Program," certain minority and EDGE businesses may be exempt from providing a bond on their first four (4) public projects depending on the size and number of successfully completed projects in the past. The exemption starts with those contracts $25,000 or less and incrementally increases to $300,000 contingent upon the contractor's successful completion of the previous project and the current participation in, or completion of, a "Qualified Contractor Assistance Program." Those same contractors are allowed to repeat the program for another four (4) projects if the contractor is still unable to obtain a bond after successfully completing the program.

Unfortunately, the type of undercapitalized companies that qualify for this program are the ones most likely to be unable to pay their bills to subs and suppliers. Subcontractors and suppliers can no longer safely presume that all Ohio public work is bonded, and may want to reconsider their credit policies with respect to such projects.

Third, many subs and suppliers are losing out on otherwise valid payment bond rights by failing to serve a notice of furnishing. Subs and suppliers on public work, who do not have a contract with the prime contractor, must serve the prime contractor with a notice of furnishing to preserve lien and bond rights. Therefore, “second tier” subcontractors and suppliers must implement a process to ensure that a notice of furnishing is timely provided.

Subs and suppliers must be vigilant about protecting their payment bond rights during this economic downturn, particularly in view of these threats.

Don Gregory is General Counsel for many construction trade associations and can be reached at dgregory@keglerbrown.com.