Terminating a Surety Bond

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En provenance du cours de Columbia University

Construction Project Management

1444 notes

Columbia University

Construction Project Management

1444 notes

Cours 1 sur 4 dans Specialization Construction Management

Construction Project Management introduces you to Project Initiation and Planning. Industry experts join Columbia University professor, Ibrahim Odeh, to give an overview of the construction industry. Professor Odeh teaches the fundamentals of the Project Development Cycle while guest lecturers discuss Lean Project Delivery method and Lean Design Behaviors. Technological advances, such as Building Information Modeling, will be introduced with real world examples of the uses of BIM during the Lifecycle of the Project. The course concludes with Professor Odeh discussing the importance of project planning and scheduling and an opportunity to develop a Work Breakdown Structure.

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Project Delivery

Professor Odeh introduces the fundamentals of the Project Development Cycle. Phillip White, a lawyer with the international firm Dentons, provides insight into Contract Types. William J. McConnell, CEO of the Vertex Companies, reviews the basics of surety bonding and Tim McManus, Vice President of Capital Projects and Infrastructure Projects at McKinsey and Company, discusses Project Delivery Methods and Surety Bonds.

Types of Surety Bonds13:46

Purchasing a Surety Bond10:55

Terminating a Surety Bond7:22

Surety Loss Data18:49

Rencontrer les enseignants

Ibrahim Odeh, Ph.D., MBA
Instructor, Department of Civil Engineering and Engineering Mechanics, Columbia University
Director of Research and Founder, Global Leaders in Construction Management

Prescriptive steps required by the obligee before termination of a performance bond,

and I'll base this on the IAA 312 bond form.

So in order to properly terminate a contract,

an obligee must request a pre-default conference.

And if it doesn't, the surety can make a demand for this conference.

The obligee then asks to declare the contractor to be formally

in default in writing.

Then there has to be a formal after that.

There has to be a formal termination for default which terminates the contract and

really triggers the surety's obligations at that point.

And then generally in a take over agreement or any form of agreement,

when there a surety takes over, there's a pledge of the contract balance.

And obligees typically don't have a problem with pledging

the contract balance.

The surety's remedies in the event of a termination are as follows.

Remedy number one, which happens to be in section five of

the 312 document is tendering back the original contractor to perform the work.

Now a lot of times this is a terminated contractor and

the obligee may not want that to happen.

But in certain instances it might just be a cash issue and the surety might

indicate that it's propped them up financially, him or her up financially,

and they tender the original contractor back to complete the work.

That's 5.1.

5.2 is a surety takeover.

In this instance, the surety actually becomes the completing surety.

The surety steps into the shoes of the original contractor,

executes a takeover agreement between the obligee, the owner, and

the surety which says contract bonds will be paid to the surety.

And then the surety, because they're not construction companies,

they'll hire a completion contractor and

they'll enter into a completion contract between the surety and the contractor.

So that's very common, that's a surety takeover.

And number three is relent to an acceptable completion contractor

and a tender.

And under a takeover or a tender, the surety generally steps in,

grabs all the documents and information, relets the work to qualified contractors.

And under a tender scenario, rather than taking over the work, they'll

say, here is a qualified contractor for $7 million.

The contract balance is 5, I'm gonna give you this contractor, and

I'm gonna give you a check for $2 million.

And then I'm done.

So that's one popular surety remedy.

And then in 5.4, the surety doesn't have to do any

relets or arrange for the original contractor to go back.

They can just say hey, your shortfall is gonna be x amount of dollars.

Here's a check.

Or they can say, we deny liability, in whole or

in part, based on the termination.

In certain instances, there are improper terminations,

whether they be procedural or just flat out improper where an owner is actually,

terminates a contractor and had no basis to terminate.

And maybe it was the owner had issues and they were causing the problems, and

they weren't paying the contractor and

that's why the contractor was suffering payment issues.

Under that scenario, which is very rare, but under that scenario,

it does happen, the sureties will say, hey, improper termination.

We're gonna deny liability here.

Under the payment bond, the AAA 312, the first bullet here is very important.

It covers claims for labor, materials and equipment furnished for

the use in the performance of the completion contract.

So claims can be made if the work was done on

a particular project that's named in the bond.

You'll see a lot of times, not a lot, but

from time to time you'll see claimants make claims.

And let's say it's a material supplier, and

it's supplied materials on 20 different projects.

The backup for the claim,

you'll see in certain instances, invoices from other projects.

So that needs to be sorted out, and

the right claims are just for the one specific project.

If claims are made from claimants to the obligee,

the obligee has a duty to pass those on to the surety and the contractor.

And claimants need to make their claims timely.

So they have to make their claims within 90 days after having last

performed work on the project.

So if it goes past 90 days their claim isn't ripe.

If the job is done, completed 100%, they demobilize,

and they were doing work on the last day of the project.

And they submit a claim 120 days later, the claim's not ripe.

The options, the surety remedies are defined

under section 7 of the 312 form, 7.1.

The claimant can send an answer to the claimant within 60 days stating

the amounts that are undisputed and the basis for challenging disputed amounts.

I mentioned that, in certain instances,

suppliers might have invoices for unrelated projects.

In that instance, they would say, okay, of your $100 claim, 60 of it's undisputed.

40 of it is disputed because these invoices relate to

other projects that aren't covered under the bonds.

They can make payment, arrange for payment, for any undisputed amounts.

And if the surety fails to discharge its obligations under 7.1 and

7.2, they shall indemnify the claimant for fees,

attorney fees, etc., if amounts are found to be due and owing.

So let's say a claimant disputes a surety's position,

they go to dispute resolution, they go to a bench trial or

a jury trial or arbitration.

And let's say the fact finders rule in favor of the claimant, well,

then the claimant can collect fees under 7.3.

Big bond, the AAA form is the A310.

It's typically filed at 20% of the bid price as I mentioned.

If the principal enters into a contract with the obligee, the bond's null and

void because they honored their bid.

If they didn't, then they're liable up to the penal sum of the bond.

So really it's the shortfall amount up to the penal sum

is what they're liable under.

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