For this weeks Guest Post Friday at Musings, we welcome Surety Bonds.com, a leading online surety provider. SuretyBonds.com specializes in educating current and prospective business owners about local surety requirements. To keep up with surety bond trends, follow and Surety Bonds Insider blog and @suretybond on Twitter.
Professionals who work in the construction industry know the laws that regulate the market change constantly. Unfortunately, even government agencies are flawed, which means they sometimes establish nonsensical, arbitrary regulations that leave construction professionals even more confused as to how they’re expected to do their jobs.
For example, back in 2007 government agencies in Vancouver had to rework laws that mandated certain green building stipulations in regard to roofs. The city essentially created a law so risky that no insurance company would provide insurance for projects related to green roof building due to the high risk for potential claims. Because insurance companies refused to issue the necessary coverage to contractors, work could not begin on any new projects until the law was reworked. Construction professionals and surety providers alike are worried this kind of hindrance could result when Washington D.C.’s 2006 Green Building Act goes into effect in January.
According to section 6b of the act:
On or before January 1, 2012, all applicants for construction governed by section 4 shall provide a performance bond, which shall be due and payable prior to receipt of a certificate of occupancy.
The bond, which could be worth up to $3 million, would be forfeited if a building should fall short of expected green building standards (such as LEED certification) outlined within the act.
“The Green Building Technical Corrections, Clarification, and Revision Amendment Act of 2009” featured a number of changes, including a fairly simple one that replaced the term “performance bond” with “bond.” Ideally, this means that the bond required by the act will function more as a license and permit bond that guarantees contractors’ compliance with statutes (a.k.a. green building codes).
After this change, it became clear that something known as a “green performance bond” would not formally exist in name. However, since the regulation hasn’t yet become enforceable, it’s still unknown just how accountable surety providers will be for contractors who build projects that don’t meet environmental standards. It still seems as though these bonds would provide a financial guarantee of a contractor’s ability to meet third-party certification standards, which is something most sureties avoid due to a lack of control.
If implemented industry-wide, these bonds would essentially function as do other license and permit bonds. At this point, one of the major concerns is how to enforce a bond in a part of the industry where there’s a lot of gray area, especially because green building regulations change so frequently.
Furthermore, surety providers are extraordinarily hesitant to write what they consider to be high risk bonds. Unfortunately it’s still unclear just how liable sureties will be for contractors who fail to meet environmental standards, and that’s something that will just have to be worked out through experience. In the meantime, sureties don’t want to risk backing a contractor that could cost them a great deal due to unforeseeable violations that are beyond their control.
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