How to Avoid Performance and Payment Bond Claims on Your Construction Project

Construction projects are intricate beasts, even the most experienced contractors can face challenges. Performance and payment bonds are there to protect the project owner in case things go south, but a bond claim can be a major headache for your business. The good news? There are proactive steps you can take to minimize the risk.

Understanding the Bonds

First, a quick rundown on the bond types:

• Performance Bond: Guarantees the project will be completed according to the contract.
• Payment Bond: Ensures subcontractors and suppliers get paid for their work and materials.

Example Potential Performance Bond Claims:

• Incomplete or Substandard Work: The project is not finished as specified in the contract, or the work completed falls below quality standards outlined in the plans. This could include unfinished electrical work, improper foundation construction, or faulty plumbing installations.
• Missed Deadlines: The contractor significantly delays the project completion beyond the agreed-upon timeframe, causing financial losses or missed opportunities for the owner.
• Abandonment of the Project: The contractor walks away from the job before completion, leaving the owner scrambling to find a replacement and potentially incurring additional costs.
• Failure to Obtain Permits or Inspections: The contractor fails to secure necessary permits or have inspections completed at critical stages, halting progress and potentially leading to fines.

Example Potential Payment Bond Claims:

• Unpaid Subcontractors or Suppliers: The contractor fails to pay subcontractors or suppliers for their work or materials, putting them in financial strain and potentially jeopardizing the project’s progress.
• Improper Payment Practices: The contractor withholds payment from subcontractors or suppliers beyond the agreed-upon terms, creating cash flow problems for them.
• Failure to Pay for Change Orders: Approved changes to the project scope are not reflected in the contractor’s payments to subcontractors or suppliers who completed the additional work.

Remember: These are just some examples, and the specifics will depend on the wording of your contract and bond.

• The burden of proof lies with the party filing the claim. They need to demonstrate the breach of contract and the resulting damages.
• There may be exclusions in the bond language, so carefully review it to understand what is and isn’t covered.
• By understanding the types of valid claims, you can be more vigilant in managing your project and identify potential issues before they escalate to a bond claim.

Building a Strong Foundation

So, how do you avoid this unpleasantness? Here are some key strategies:

• Contract Clarity: Before anything else, thoroughly understand the contract. Are deadlines realistic? Are there clear communication protocols? If something seems ambiguous, get clarification before you sign.
• Bid Smart: Don’t underbid just to win the job. Carefully assess the project scope, timeline, and potential risks. Factor in a buffer for unforeseen circumstances.
• Pick the Right Team: Assemble a qualified team of subcontractors and suppliers with a proven track record. Check references and get everything in writing, including payment terms. Consider bonding your subcontractors.  See our 5 Essential Tips for Prequalifying Subcontractors.
• Communication is Key: Maintain open and frequent communication with the project owner, subcontractors, and suppliers. Address issues promptly and document everything. Keep detailed records of change orders, delays, and approvals.
• Project Management Matters: Implement a robust project management plan. This includes clear scheduling, budget tracking, and risk mitigation strategies.
• Don’t Be Afraid to Adapt: Unexpected challenges are inevitable. Be proactive in finding solutions and keep everyone informed of adjustments to the plan.

Building Trust with Your Surety

• Develop a Relationship: Maintain a positive relationship with your surety company. Inform them of any potential issues early on.
• Work with an agent that is well versed in contract surety.
• Financial Fitness: Demonstrate strong financial health. Surety companies are more likely to support contractors with a good track record.

Bonus Tip: Consider using dispute resolution mechanisms outlined in the contract before resorting to a bond claim.

By following these steps, you can significantly reduce the risk of performance and payment bond claims. Remember, a successful construction project relies on clear communication, meticulous planning, and a commitment to quality. By prioritizing these aspects, you can ensure a smooth build and avoid unwanted financial burdens.

The information provided above is for general informational purposes only and does not constitute legal advice.  Do not rely solely on the information presented here as a substitute for professional legal counsel.

About Surety1.com

Surety1.com is a service of AssuredPartners one of the largest and fastest growing insurance agencies in the nation. Representing over a dozen surety bond companies, Surety1.com is the premier provider of surety bonds for the construction industry since 2003.

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