Surety bond – Construction Law Musings- Richmond, VA

Bid Bonds: The First Preventative Measure for Your Project

Originally posted 2010-07-23 09:00:11.

For this week’s Guest Post Friday, Construction Law Musings welcomes Danielle Rodabaugh. Danielle is a principal for Surety Bonds.com, an agency that issues surety bonds to individuals and businesses across the nation. She writes articles to clarify bonding rules and regulations for those who have a stake in the surety bond industry–from contractors to telemarketers, and every professional in between.

In construction we often value performance and payment bonds when considering how to protect the financial investments put into a project. We do so because these bonds provide a legal financial guarantee that the selected contractor will fulfill the contract. However, a third, equally protective kind of construction bond is often overlooked.

Before an official contract has been agreed to and successfully executed, bid bonds guarantee that the selected low-bidder will officially enter into the contract at a later date. Bidders must submit a bid bond with their bid. Without doing so, the bidder becomes non-responsive–or an invalid candidate. Sometimes we overlook the benefits provided by this kind of Virginia surety bond, and yet they frequently act as the only legal protection for a project prior to groundbreaking.

The purpose of bid bonds
The primary purpose of a bid bond is to assure the client funding the project that the low bidder will enter into a contract for the price quoted in its bid. This has two major benefits:

The low bidder is now unable to increase its bid on the project.
If the contractor refuses to enter into the official contract with the client at a later time, the bond allows the client to recover the difference between the accepted bid and the next-lowest bid.

Bid bonds also mandate that the bidder will secure other required performance and payment bonds as necessary, reaffirming that the contractor will fulfill its duties to the developer.

Bid bond forfeiture
If the principal should decide to opt out of the contract, then the entity will be held accountable for paying reparation in the amount of:

the difference between the amount of the faulty bidder’s bid and the next-lowest bid or, if a lesser sum:
the face value of the bond

If a principal breaks the contract, the obligee usually collects damages in the amount of how much more they now have to pay to contract the next-lowest bidder for the project. In such collection cases it’s not unusual for courts to base their decisions on precendent rather than legal stipulations, as regulations in the bonding industry are constantly evolving.

Bid bond costs
If you’re a bidder, you need to check to see whether a bid bond is needed before you start preparing a bid so that you can estimate what the approximate penal sum will be. As with other construction bonds, all publicly-funded projects in Virginia that exceed $100,000 require a bid bond. A bond’s penal sum varies for many reasons, including:

the project’s total projected cost
contract terms
the area in which the contract is executed

Depending on the jurisdiction, the principal usually needs to provide between 5 and 10 percent of the bid upfront to guarantee its accountability to the client. Federally-funded projects usually set a higher standard of 20 percent. For example, if a contractor bids $100,000 on a project, the entity will need to provide a $5,000 to $10,000 (or $20,000 for a federally-funded project) bid bond prior to beginning work. This cost is calculated to protect the owner in case the low-bidder opts out of the contract, and the surety will not pay more than this amount if the principal defaults on the bond’s payment.

For construction professionals working on a smaller scale, the U.S. Small Business Administration offers a surety program for small businesses. The SBA can also guarantee bonds for contracts up to $2 million for riskier principals. Small and emerging contractors who cannot obtain surety bonds through regular commercial channels can take advantage of the SBA to back their bid, performance, and payment bonds.

Building Green: What it Means for Your Business

For this week’s Guest Post Friday, Musings welcomes Kevin Kaiser. Kevin is the online marketing director for Surety Bonds.com, a leading online surety company. He specializes in educating current and prospective business owners about local surety requirements. He helps contribute to the Surety Bond Education Center and the Surety Bond Insider. To keep up with surety bond trends, follow Kevin and his cohorts on twitter.

D.C. officials are considering changes to a promising-yet-controversial green building law that has raised the ire of the surety industry.

The landmark 2006 Green Building Act mandates new green building requirements for private and public building projects in the District. According to the new regulations, which are set to take full effect in 2012, projects that fail to hit the necessary energy efficiencies and other green standards would be on the hook financially — with the money coming from the developer’s performance bond posted with the city.

But surety companies and industry groups have expressed concern with the concept of a “green performance bond.” These key risk-mitigation tools are standard for most construction projects and ensure that project owners and taxpayers are protected if the contract defaults or fails to follow the contract.

But surety companies are uneasy about the idea of guaranteed performance when it comes to green building. And there are also questions about who’s really on the hook if a contractor fails to hit the mandated energy-efficiency levels.

Historically, sureties have balked at bonding projects that require specific environmental benchmarks or third-party certification. LEED certification and other national designations require an OK from third parties like the U.S. Green Building Council.

As currently written, the act’s language may leave project developers scrambling to find companies will to issue suitable bonds.

“It’s not always the party that has to post the bond that’s responsible for that element of LEED certification,” Bob Duke, director of underwriting and assistant counsel for the District-based Surety and Fidelity Association, told the Washington Business Journal. “Maybe the party posting the bond doesn’t have control of the total obligation.”

But it looks like a compromise may be coming.

Surety industry officials and other D.C. experts have been working to resolve the bonding issue regarding the Green Building Act. A small semantic yet significant step may be changing the regulations to require a “bond” rather than a “performance bond,” according to the WBJ.

“There is confusion as to the ‘performance bond’ required by the Green Building Act,” Chris Cheatham, a D.C. attorney who’s covered the issue extensively on his environmental construction law blog, told the Washington Business Journal. “Revising the requirement to a “bond” should eliminate some confusion but questions still remain as to the availability of these types of bonds.”

Both Kevin and I welcome your comments below. Also, please subscribe to keep up with this and other Guest Post Fridays here at Construction Law Musings.

Deadline Nears for “Green Performance Bond” Implementation

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.

Continue reading Deadline Nears for “Green Performance Bond” Implementation

Why Contractors Should Notify Bonding Companies Quickly

With the rise in federal and state construction projects, and the need for contractors and other construction professionals to seek out these projects in the present economy, focus on the Miller Act and your state’s “Little Miller Act” is key. As a quick reminder, the Miller Act essentially requires that a general contractor carry a payment and performance bond on any project it constructs valued at over $100,000. Such bonds assure payment to subcontractors and suppliers and assure completion to the owner (in this case a federal agency or entity).

In order to claim on such a bond, a subcontractor or construction material supplier must give notice to the general contractor (and preferably the surety) within 90 days of the last date of work or material delivery. After that the subcontractor or supplier has a year to file suit should suit become necessary.

As always, a construction contract is involved and that contract likely provides for prejudgment interest on any amounts left unpaid. The interaction between the Miller Act and such a provision was recently examined by the Eastern District of Virginia Federal District Court. In Attard Industries Inc. v. U.S. Fire Ins. Co. the Court faced the question of when prejudgment interest begins to accrue against a surety. The short version of the facts is the following: after judgment, the surety, U. S. Fire, challenged the judgment and argued that the jury awarded prejudgment interest from too early a date when it awarded interest beginning at the date of breach as opposed to the date of the first notice by the subcontractor to the surety.

The Court agreed with U. S. Fire, reasoning that the purpose of the notice is to give the surety a chance to resolve the claim and that a surety has no obligation or ability to control when a demand on its bond is made. Therefore, the Court concluded (along with several jurisdictions cited in the opinion) that prejudgment interest can only be awarded beginning with the date of the first demand and sliced a bit over two years worth of interest from the verdict amount.

The takeaway? If you are a subcontractor or supplier on a federal construction project, notify the surety promptly and demand that it make payment pursuant to the bond. The earlier the better. As this case illustrates, you could lose a significant amount of money on your claim if you don’t.

If you are worried that the notice may be too early (or too late) consult a Virginia construction attorney for advice.

As always, I welcome your comments below. Please subscribe to keep up with this and other Construction Law Musings.

The Insider’s Guide to Finding a Surety Company

For this week’s Guest Post Friday here at Construction Law Musings, we welcome Alex Levin. Alex is a writer for Lance Surety, a nationwide surety bond company who write and provide a variety of bond types from construction bonds to auto dealer bonds.

In the eyes of many contractors and licensed business people, obtaining a surety bond is a necessary evil in their quest to take on work. Whether you are applying for your first surety bond or are shopping around for a new surety bond company, understanding what to look for before signing with a surety company is essential.

1) Check their license

Any company that issues surety bonds must be licensed by the insurance department of the state in which they operate. Periodically, these licensing departments will perform exams of the surety company to ensure they are practicing in accordance with legal and ethical guidelines.

2) Know your project

If you’re beginning work on a federal government construction project, your surety company must not only be licensed by the insurance department, but also certified by the U.S. Department of the Treasury. The Treasury Dept. maintains an online list of certified companies that can be used as a reference when beginning the search process. The database lists all federally certified surety companies along with the states in which they are licensed to write bonds and the total underwriting limit that has been set for them by the government.

Continue reading The Insider’s Guide to Finding a Surety Company