A bid bond states that the contractor will enter into a contract if one is offered at the price quoted ... bonded job pr
Mastering Negotiations on Surety Bond Requirements
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Mastering Negotiations on Surety Bond Requirements Prime Contractor-Supplied Bonds Surety bonds are required on practically all public construction projects and on some private projects. There are three types of bonds generally used on construction projects 1) 2) 3)
Bid bonds. Performance bonds. Payment bonds.
A bid bond states that the contractor will enter into a contract if one is offered at the price quoted, and that it will furnish whatever additional bonds are specified. If the contractor fails to do either, the bid bond specifies a penalty that may be paid to the owner for damages. Generally, this penalty is the difference between the bid amount and the bid by the next lowest contractor for the work involved. A performance bond states that the contractor will furnish and install whatever it has contracted to build in accordance with the contract plan and specifications. A payment bond states that those that supply labor and materials on a project will be paid subject to any restrictions and limitations imposed by statute, the contract or subcontract, and/or the bond itself. The terms of bonds vary dramatically. On public work, many of the parameters in the bond, particularly notice requirements, are established by law. On federal construction projects, the Miller Act sets the rules. Similar individual state laws, known as Little Miller Acts, set the rules for most state, county and municipal work. For information about the statutory bond laws in your state, see the Foundation of ASA’s Lien and Bond Claims in the 50 States. A subcontractor should get a copy of the payment bond from the prime contractor on a bonded job prior to signing the subcontract. With a copy of the payment bond, a subcontractor can make sure that a financially-secure surety issued the bond and that the dollar amount of the bond is sufficient to cover possible claims. A subcontractor also can determine the notice and other procedures it will need to follow to assert a claim and possibly file suit, should the need arise. Too many subcontractors’ bond claims have been lost because they waited until the last moment to seek bond information. Even the name of the surety can be hard to get after a prime contractor is in serious trouble.
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Under federal and most state laws, a potential claimant is entitled to obtain a copy of the prime contractor’s bond upon request to the public contracting agency. Another federal law requires a government contracting officer and the prime contractor to provide prospective subcontractors and suppliers with a copy of the payment bond, upon request. Further, a prime contractor on federal construction may not prohibit its subcontractors from contacting the contracting officer for payment information. The ConsensusDocs Form 750, Standard Agreement Between Constructor and Subcontractor, clearly requires a prime contractor to provide a copy of its payment bond to a subcontractor. Paragraph 4.6 states: “Constructor shall provide to Subcontractor a copy of Constructor’s payment bond on the Project upon the Subcontract Work commencing.” By contrast, some proprietary subcontract forms omit any reference to a copy of the payment bond being made available to the subcontractor. Sometimes when a subcontractor suggests adding the ConsensusDocs language cited above to the subcontract, the prime contractor responds by giving the subcontractor a copy of the bond. This accomplishes the desired result. The important point is to get the bond promptly. Once a subcontractor has a copy of the prime contractor’s bond, there are a number of sources to which it can turn to determine if a bond is valid. The Bond Obligee Guide, published by the Surety and Fidelity Association of America, contains a list of surety companies that have volunteered to be included on this list along with information as to how they can be contacted for the purposes of authenticating a bond. The Guide and additional information is available at http://www.surety.org/?page=VerifyYourBond. Subcontractors and suppliers also can determine if a surety is admitted in the jurisdiction of the project by checking with the state insurance department. The National Association of Insurance Commissioners’ Web site has an interactive map that links to each state’s insurance department at http://www.naic.org/state_web_map.htm. The Department of Treasury’s Circular 570 contains a list of approved sureties for federal projects; the so-called Treasury List is available at https://www.fiscal.treasury.gov/fsreports/ref/suretyBnd/c570.htm. A bond of questionable validity may limit the payment to the amount payable by the owner to the prime contractor, cover only a portion of the project or not exceed the prime contractor’s net worth. Therefore, the payment bond may not assure that sufficient funds are available to pay all of the claims of subcontractors and suppliers on a project.
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Nearly all payment bonds secured by a prime contractor cover first-tier subcontractors and suppliers. That is, all of those having a direct contractual relationship with the prime contractor are covered. Most bonds also cover second-tier subcontractors and suppliers to first-tier subcontractors. However, few prime contractor bonds cover lower-tier subcontractors or suppliers to suppliers. Thus, it is important for a subcontractor or supplier to be clear where it stands as a member of the construction team to determine whether it has the right to assert a claim under the prime contractor’s payment bond. In most cases, there is a limited time frame during which a subcontractor may assert a payment bond claim. For example, under the federal Miller Act, a subcontractor cannot assert a claim under the bond until 90 days after it last furnished labor or materials. Also, a suit must be filed within one year after the subcontractor last furnished labor or materials. The requirements differ from state to state on public work, and may differ still for private projects. Again, see FASA’s Liens and Bonds Claims in the 50 States for details on the law in your state. In addition, a payment bond will require a subcontractor to meet specific notice requirements to assert a claim. These requirements may include to whom notice of a claim must be given, and the form and timing of that notice. Subcontractors not having a direct contractual relationship with the prime contractor may be subject to additional notice requirements. Sometimes notices are measured from the time of subcontract completion; other times notices are measured from the time of project completion. Sureties generally deny claims that do not comply with each requirement spelled out in the bond or in the law. The subcontractor has the responsibility to identify, understand and comply with each of those requirements. For more information about procedures that a subcontractor may be required to assert a payment bond claim under state law, see the Foundation of ASA’s manual, Lien and Bond Claims in the 50 States. Sureties also generally assert that their obligation to pay a claim under a payment bond only extends to money actually owned by the prime contractor to the subcontractor. For example, if the owner has not paid the prime contractor and the subcontract contains a pay-if-paid clause, the courts in some states have ruled that the subcontractor has no right to payment under the payment bond.
Subcontractor-Supplied Bonds For the same reasons that an owner may require bonds from a prime contractor, a prime contractor may require bonds from some of its subcontractors. These may be intended to protect the prime contractor if the subcontractor fails to perform, and also to provide payment protection for the sub-subcontractors and suppliers of the subcontractor. 3
Sometimes, an owner, in its contract with the prime contractor, may require that certain subcontractors be bonded. Other times, a prime contractor’s own surety or other creditors may require that it bond its subcontractors. Finally, the owner may elect to require bonding by all major subcontractors in addition to or in lieu of a prime contractor bond. Ordinarily, the requirement for a subcontractor bond is spelled out in the bid documents. A subcontractor may be instructed to attach its bid bond to its bid. A bid bond can be obtained by the subcontractor from its surety, usually at little or no cost. Often, prime contractors use bid bonds as a pre-qualification device to evaluate the potential of prospective subcontractors. Sometimes, the price for a performance and payment bond is bid as an alternate. The prime contractor can decide later whether or not to incorporate the bonding requirement into the subcontract, as the price indicated. Occasionally, a prime contractor does not request a bond until it awards the subcontract. This can be troublesome for subcontractors with limited bonding capacity or for those whose surety require a lengthy processing period. Some prime contractors include provisions in their subcontracts that require subcontractors to provide bonds upon demand at any time during the subcontract. For example: “The Contractor may elect to direct the Subcontractor to furnish performance and payment bonds at any time during progress of the project. Payment for any such bond shall be for the amount actually paid by the Subcontractor to its surety for such bonds.” Such a provision can be quite troublesome. Many sureties are reluctant to provide bonds after work or a project is underway. Yet, if a subcontractor cannot provide a bond that the prime contractor demands, the subcontractor could be found to be in breach of the subcontract. Therefore, unless a subcontractor has extensive bonding capacity and is assured of its ability to obtain a bond mid-project, it should seriously consider deleting a subcontract provision that may require it to provide bonds at any time later than the execution date of the subcontract. Even for those subcontractors in a position to provide bonds upon demand, there is no reason to limit the extra charge to actual bond cost. A subcontractor should be allowed a reasonable mark-up for overhead and for use of its bonding capacity. 4
Negotiating Tips Here are some typical arguments that can be used during negotiations about bonds with prime contractors: I’ve brought you my insurance certificates in exchange for a copy of your payment bond on the job. We received copies of all the contract documents, with the exception of your payment bond. The bond is an important part of the documents, and standard industry contracts say that subs are entitled to those copies. The bid documents say nothing about bonds being required. I’m willing to get these for you now, but I can’t agree to furnish them later, since I may have used my bond capacity elsewhere by then. You questioned why my charge for bonds was more than others. I provided the bonds as an accommodation and need something for my overhead and the use of my bonding capacity.
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