Are you considering working on government construction contracts in light of the new Infrastructure law? If so, it is important to understand one of the most imperative, need-to-know hiccups you could encounter: a Bond. When it comes to government construction contracts, bonds tend to be an area of great confusion, and they can screw over contractors significantly as a result. That’s why we cannot emphasize the importance of understanding them thoroughly. In this blog, we will break down the functions of a bond and explain what to look out for when working on government construction contracts that require their use.
What is a Bond?
When it comes to your government construction contracts, you may be required to sign a bond when signing your contract. In short, a bond is a guarantee of your services. On public projects, there are normally two different types of bonds or guarantees required; a payment bond and a performance bond. A payment bond is a guarantee to whomever the bond is issued that the company providing the bond will pay everyone it owes money to for labor and materials supplied to the project. If they fail to do so, the bond company will pay any unpaid amounts. A performance bond guarantees to the company or government that the company providing the bond will complete the scope of work. If they fail, the bond company will pay the company or government whatever the cost is to complete the scope of work the company providing the bond was hired to do.
How Does a Bond Work?
While the description of a bond does not sound too intimidating, how a bond works can become lethal. A bond is not insurance, meaning that if a bond company is required to pay any amount, it will seek repayment from the company that requested its bond be issued. If you have been required to provide a bond before then, you are aware that you must sign a personal guarantee and pledge all your company and personal assets to the bond company as a form of repayment should the bond company be required to pay out on the guarantee it issued. When you are required to provide a bond on a project, you are essentially personally guaranteeing your company’s performance of the contract. The bond company can use your personal assets, such as your bank account, car, or home, to satisfy the cost owed. We are not trying to freak you out; we just want you to go into any project that requires a bond with your eyes wide open.
Another part of the agreement you sign with the bond company allows them to pay a claim whether you agree with the claim or not. Just imagine this situation: You are the structural steel subcontractor on a big project that requires you to provide a payment and performance bond to the general contractor. When you decided to bid on the project, you neglected to include any steel lintels to be used by the masonry subcontractors. However, the masonry lintels are included in the scope of work in the subcontract that you signed, and the value of these lintels is around $30k.
You disagree that you should be required to provide the lintels, but if you decide not to provide them, the general contractor can file a claim on your bond, and the bond company can pay the $30k to the general contractor without you agreeing to it, ultimately leaving you to pay the bond company back the $30k. In this scenario, you are screwed out of $30k if you aren’t careful and considerate of your contract, especially the details of your scope.
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Government Construction Contracts Bonds: Warnings, Tips, and Tricks
You must add to your government construction contracts that require you to provide a bond that you have a chance to object to any bond claim made before the bond company pays any claim. You should also ensure that if a claim is filed against your bond, you respond immediately in writing to both the bond company and the company making a claim on your bond. Inform them that you dispute the claim and list the specific reason why. It is also a good idea to get to know the agent that issued your company the bond since, most likely, they will also have some pull with the bond company deciding whether or not to pay a claim filed against your bond.
Another issue to be cautious of is a request for a bond after you have already begun the project. In our experience, this is only requested if the company requesting the bond sees a default or creates a default for the purpose of filing on your bond. For example, say you are a stucco subcontractor on a commercial project, and you signed a subcontract agreeing that the general contractor could require you to provide a bond at any time during the project.
You unknowingly used the wrong type of finish on a part of the project, and the general contractor notices but does not say anything immediately. The general contractor requires you to provide a bond in the middle of the project. Once you get the bond, the general contractor files a claim for a portion of the work that you used the incorrect finish and demands payment for the cost to redo your work.
Bonds can cause concern if you aren’t properly informed about their functions and pitfalls. Knowing how best to prepare for, approach, and protect against the most common issues on projects requiring bonds is a sure-fire way to keep your construction company as protected as possible. Work under the new Infrastructure Act is unique in many ways, and government construction contracts come with their own specific rules and regulations.
You need to be informed when venturing into government work for the first time. For more help navigating your government construction contracts, refer to a skilled construction attorney like those on our team here at The Cromeens Law Firm. Nothing beats airtight legal support when preparing and protecting your company from problems.
This article is intended as a general educational overview of the subject matter and is not intended to be a comprehensive survey of recent jurisprudence, nor a substitute for legal advice for a specific legal matter. If you have a legal issue, consult an attorney.