In case the contractor defaults, the owner may file a claim to recover the damages amounting to the total cost of the job. A performance bond is a common fixture for public works contracts.

Bond Terms

Before a bond is acquired, both parties must first be amenable to the terms of the bond. The full scope of the required work, the time frame for completion, and the estimated value of the work must first be determined before the bond is issued. The issuer usually defines the terms of the performance bond, including the claims and payment.

Bond Cost

The cost for this type of bond is paid for by the contractor; and this is typically included in the cost of their bid for the particular project. The cost of the bond depends on various factors, and these include the type of construction being done, and the full cost of the required work. It ranges from 1 to 5% of the total estimated construction cost. If the issuer finds the contractor to be a risky investment, higher upfront bonding costs, including interest, may be imposed.

Bond Benefits

This type of insurance or bond is basically a policy for the owner. A contractor must first be qualified in order to be bonded, so its ability to acquire a bond is in itself an assurance to the owner that the said contractor is likely to complete the job, and that it is financially stable.

A performance bond likewise gives the assurance that in case the contractor defaults on its obligations to deliver or takes a longer time to comply than what is agreed upon, the owner will be compensated for the losses accordingly. In any case, the owner is shielded from any possible financial damage or loss arising from the project.

Bond Disadvantages

The required bond to ensure performance places smaller general contractors at a distinct disadvantage in securing projects as they may not be able to at least qualify or afford to be bonded. There are also some contractors who may not be willing to spend upfront for bonding requirements or undertake the additional work required just to secure a performance bond, and this could result to fewer bidders.

Less competition provides a good opportunity for the remaining bidders (usually larger contractors) to place higher bids. In any case, the bid costs may be higher because contractors will definitely include the bond cost in their project cost estimates that will ultimately be passed on to the owner.

The following are the 4 major classifications covered in a payment bond claim:

• Wages. Consists of contributions to pension funds, yet does not consist of tax obligations.
• Materials.   Must be used in the job.
• Parts and Repair work.  Can be covered if utilized only for the job.
• Equipment and tools.   Lease and rental value are normally covered, yet acquisition and financings are not.

The good news is, valid repayment bond cases are cleared up quite promptly. The surety is only accountable for the penal sum of the bond so once that amount is exhausted their obligation stops.

It’s in all party’s best interest to obtain a reasonable and fast resolution for a repayment bond case. One of the blunders that professionals make is waiting to get the surety involved or withholding info.  Remember, surety bonds require indemnification from the service provider’s company and usually personal indemnification from the owners, their partners and others. Because of this, it is in the best interest of the contractor to partner with the surety to limit the loss.

One tip: keep in mind that, unlike insurance coverage, bonds are composed on a no reduction basis and you normally compensate the surety for all reductions – including attorney fees, etc.

Here’s a brief video on payment bond claims:

Unfortunately, payment bond claims can be particularly detrimental to a fiscally sound contractor as, many times, the contractor does not understand there is an issue till a claim is declared.  What’s more, it can also result in a surety paying for work or product twice.

So, how does this work?  Let’s assume that a material provider of one of the contractor’s subcontractors was not paid, even though the contractor paid the subcontractor for the material. The materials vendor could possibly sue against the payment bond and the principal would be obliged to pay for the material once more just to satisfy the claim.

This is one reason why a contractor requires a bond from a subcontractor (to eliminate the double repayment risk).

Here’s a link to the youtube embed of a video on Payment Bond Claims.

Exactly what takes place if you receive a claim on a job?  Instead of diving into the legal minutiae, let’s instead just briefly go over the standard operations and what you have to know.  It’s vital to remember that, unlike insurance, bonds are based on a no reduction basis.  That means you typically have to indemnify the surety for all losses – such as attorney fees, delay loss, and many more

Performance Bond Claims

A performance bond is an agreement where the bond firm (the surety) guarantees that the service provider (the principal) will certainly carry out the terms of the deal to the project owner or general contractor (the obligee).

The initial action in the claim process is to review the contract and associated bond forms. Almost all performance bonds need four events to take place prior to the surety having to act under the bond:

1. The contractor has to be in default (breach of contract).

2. The obligee needs to state the contractor is in default.

3. The obligee needs to have performed its responsibilities under the deal.

4. The obligee must terminate the principal’s right to continue.

Once these requirements have actually been met, it is the bond firm’s obligation to check out the claim. If the default is proper, then the surety has one of four choices to pursue. These options are:

1. Financing the contractor.  This alternative has the surety giving monetary help to the contractor to complete the task. It’s essential to remember that all economic support from the surety adds to the reduction claim and the surety expects compensation from the contractor. Commonly, in a funding situation, the surety needs the contractor to reaffirm its promise of personal assets and/or create a joint inspection bank account to manage agreement earnings.

2. Takeover the job.  This option permits the surety to take control of the deal and finish the job. The surety then subcontracts the work to a completion contractor. Not remarkably, this is the surety’s least preferred choice and the obligee’s most favored option.

3. Tender New Contractor. The surety selects a completion contractor, haggles the rate on the contract and after that sends the terms to the obligee for approval. Oftentimes, a surety will take this option when the principal challenges the default.  The surety can easily tender a brand-new completion contractor and later dispute any sort of liability along with the obligee.

4. Obligee Completion. This is often described as owner finalization or the do nothing choice. This is an option if dangerous waste is entailed, the surety believes the contractor has a valid defense, the obligee will not lose any money as the contract is still profitable and will certainly cover the expense of finalization, or the expense to complete will be greater than the penal amount of the bond.

Email us at: gary@swiftbonds.com or visit our site at http://swiftbonds.com

This video has nothing to do with bonds.  It was made by my young son and, well, this old guy thought it was neat.

http://youtu.be/DG-6WEhvCDk

According to the National Institute of Safety and Health, the most frequently cited Occupational Safety and Health Administration (OSHA) electrical violation is improper grounding of equipment or circuits. This is especially troubling for construction managers in light of the fact that construction workers suffer more electrical burns and fatal electrical injuries than workers in all other industries combined. Each incident carries significant costs in terms of lost time and resources and increases the employer’s risk of costly lawsuits. The most tragic aspect is that many of these accidents could have been prevented with the implementation of proper ground-fault protection practices.

OSHA Regulations

OSHA requires employers to provide either: (a) ground fault circuit interrupters (GFCIs) on construction sites for receptacle outlets in use and not part of the permanent wiring of the building or structure; or (b) a scheduled and recorded Assured Equipment Grounding Conductor Program (AEGCP), covering all cord sets, receptacles not part of the permanent wiring of the building, and equipment connected by cord and plug.

About GFCIs

Grounding a tool or electrical system involves creating a low-resistance electrical path that connects to the earth. A ground-fault occurs in a tool or electrical system when there is a break in this low-resistance grounding path. The electrical current may then take an alternative path to the ground through the user, resulting in serious injuries or death. GFCIs automatically limit or stop the flow of current in the event of a ground fault, overload or short circuit in the wiring system. They operate by monitoring the amount of current going into electric equipment and the amount of current flowing out along the circuit conductors. If the difference exceeds 5 milliamperes, the device automatically shuts off the power to prevent injury.

About AEGCPs

The OSHA-approved alternative to using GFCIs on a construction site is an AEGCP, which is a regimented system for testing electrical tools and extension cords to assure their proper grounding. If an AEGCP is used in place of GFCIs for ground-fault protection, the following minimum requirements apply:

         Keep a written description of the program at the jobsite. Outline specific procedures for the required equipment inspections, tests and test schedule, and make them available to OSHA and to affected persons upon demand.

         Designate one or more competent persons to implement the program. OSHA defines a competent person as someone who is a) qualified to identify hazards and b) authorized to take prompt corrective measures.

         Visually inspect all cord sets, attachment caps, plugs and receptacles, and any equipment connected by cord and plug, before use each day. If you see any external damage, such as deformed or missing pins, damaged insulation, etc., or discover internal damage, take the equipment out of use until it is repaired.

         Perform two OSHA-required tests on all electrical equipment: a continuity test, and a terminal connection test. These tests are required:

o          Before first use

o          After any repairs, and before placing back in service

o          After suspected damage, and before returning to use

o          Every 3 months

         Maintain a written record of the required tests, identifying all equipment that passed the test and the last date it was tested (or the testing interval). Like the program description, make it available to OSHA inspectors and affected persons upon demand.

Using GFCIs in Conjunction with AEGCPs

Although OSHA permits the use of an AEGCP in lieu of GFCIs, it would be a mistake to view the choice as strictly an either/or proposition. The best course of action is to use GFCIs in conjunction with an Assured Equipment Grounding Conductor Program. Taking this step will not eliminate the possibility of a costly electrical accident on the worksite, but it will significantly reduce the risk of injury or death due to ground faults.

For more risk management tips, contact gary@swiftbonds.com.

Source: OSHA

Part III: The Security in Bonding Act

LeClair said an important bill for the surety bond industry, the Security in Bonding Act, will likely have to be reintroduced in the new session of Congress. The bill was passed by the House in the current session of Congress, but has stalled in the Senate’s Homeland Security and Governmental Affairs Committee.

The bill sets standards for assets pledged to back individual surety bonds on federal construction projects. The assets are to be obligations such as U.S. Treasury notes and other public debt instruments unconditionally guaranteed by the federal government. The bill is designed to address instances of fraud and abuse by providers of individual surety bonds. Such bonds are provided by an individual, for example, rather than by a licensed bonding company.

House approval in the next Congress shouldn’t be a problem based on the success of the 2012 bill, LeClair said, but he noted that there will be several new members on the Senate committee on Homeland Security and Governmental Affairs where the bill will likely be referred.

In the next session of Congress, the NASBP and SFAA will be seeking legislation to exempt the Miller Act from inflation adjustments so small businesses will be protected on smaller jobs. The act currently requires bonding on projects over $150,000, but inflation adjustments could push the minimum to $200,000 in the future. With such a change, projects below that amount would not have to be covered by bonds, and subcontractors and suppliers would not be protected from a general contractor’s nonpayment.

The NASBP also is hopeful the legislative reconciliation process for the National Defense Authorization Act will include raising the contract size guaranteed by the U.S. Small Business Administration from $2 million to $6.5 million, LeClair said.  END

Ken Simonson is the Chief Economist for The Associated General Contractors of America in Arlington, Va.

Lawrence LeClair is Director of Government Relations for the National Association of Surety Bond Producers in Washington, D.C.

Lenore Marema is Vice President of Government Affairs for the Surety & Fidelity Association of America in Washington, D.C.