Don't Play Hide and Seek with Your Bonds
Hidden Risks of Providing Bonds on Behalf of Project Owners
The construction market for the private sector is booming again – and work opportunities are abundant. This is good for all of us connected to the construction industry, and hopefully the good times will continue!
Contractors competing in the private work sector commonly offer additional value to their customers by helping support guarantee requirements of their owner/developer clients. They offer, or are required by the project owners, to guarantee the development agreements that project owners sign with the local municipalities. The usual method of this guarantee is a surety bond, which they provide through their corporate program. These bonds can be referred to as completion or subdivision bonds.
The common misconception is that these bonds cover construction-only, much like the performance bonds that they post to guarantee their contracts with the project owner. However, these bonds offer much more – and in the process of posting a bond for a third-party, contractual rights that are typically afforded don’t exist.
First, development agreement typically provides for more than just the construction of a building, civil improvements, etc. The project owners are responsible for the funding. Therefore, in the process of providing this completion bond, contractors are directly guaranteeing the project funding for the improvements offered in the development agreement. This differs greatly from a traditional performance bond on a construction contract, where the counter-party bears the responsibility of the project financing. If push comes to shove, the contractor and provider of the bond could be required to build the improvements without the benefit of any payment.
Additionally, as the contractor isn’t a party to the underlying contract (development agreement), they could be called to perform without the benefit of being part of the decision and dispute resolution chain. A project owner could get into a dispute with the municipality and simply walk away, while the contractor is left holding the bag for the responsibilities under the contract that has been guaranteed.
Realistically, these arrangements won’t go away. Contractors looking for work will offer to bond the development on behalf of an owner to appease a repeat client or win a job to build the project. However, it’s important to understand the risks associated in providing this bond.
Important things to keep in mind:
- Know the people that you are working for
- Confirm any financing on the job to ensure that the funding is solid
- Work to have an indemnity clause in your contract with the owner, in the event that you’re required to post this bond for them
- Keep tabs on the aspects of the development outside of the actual construction
- Proactively address any negative developments that could affect the bonded obligation
It comes down to a business decision in most cases, and sureties understand that and support these arrangements. However, be smart and diligent to ensure that this hidden liability doesn’t cost it in the end.
A member of the ‘A’ Team is happy to chat about any questions you have on bonds, and other construction risks.
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- Bonds: Insurance of Surety Shades of Grey?
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