Surety bonds

How do you prepare for the current challenges in the construction market?

You should partner with a qualified accounting firm. The surety will insist on having a firm involved that can present a comprehensive financial statement including a work in process statement that ties into the balance sheet and profit and loss statement. You can anticipate a review level statement will be the minimum level requirement and a full audit likely as you expand the program. You also need to partner with a qualified construction law firm that is familiar with the public works environment. These attorneys understand how litigious this environment is and can advise you on the ramifications of construction litigation issues.

You should have a professional surety agent on your team, one who is a member of the National Association of Surety Bond Producers. They have been involved in the surety and public works environment for years and can offer invaluable counsel.

Given that you must list your subcontractors on bid day you should require in your scope that major subcontractors also provide bonds. If you do not do this at bid time, you cannot require it later.

Are these bonds always required?

Bonds are required by federal and state law on public works projects. Surety bonds protect the suppliers and subcontractors because they have no lien rights. However, it does not protect the general contractor. Given the budgetary shortfalls of the current economy, public entities may not be able to pay contractors for a project. You should be careful when entering into a project to make sure the entity has the sufficient funds, particularly if change orders might be involved. In California if general contractors do not get paid, they still have the obligation to pay the subcontractors and suppliers. This obligation extends to the surety.

What can happen if you don’t have a surety bond in place for a project?

If the contractor or subcontractor defaults, your contract price can escalate because you have to bring another contractor or subcontractor in to complete the project. You may end up paying for work, supplies and materials twice, thus increasing your project costs.

A surety will ultimately step in if the contractor or subcontractor defaults. The surety will determine if there’s a valid claim, examine the situation and decide how to proceed. There are several actions the surety can take:

  • Bring in another contractor or subcontractor to complete the project
  • Have the owner/contractor bring in other contractors to complete the project
  • Negotiate with the owner/contractor to buy out the damages
  • Continue to finance their principal through the work

Sureties generally prefer to keep the existing contractor on the project and finance it through completion, assuming that they still have a viable contractor.

John M. Garrett, CPCU, is the president of GMGS Insurance Services Inc. Reach him at [email protected] or (949) 559-3362.