As part of our recent theme of blogs “Performance Bond Toolkit,” phasing a project is another tool that can be utilized. Phasing the project into smaller more manageable pieces can help a contractor secure the performance bond they otherwise may not be able to obtain.
What is phasing? Phasing of a project really means splitting one contract into two or more separate contracts. Like a lot of tools in a contractor’s performance bond toolkit, phasing is not the answer for every contractor or project, and only makes sense in the right scenario. When does it make sense?
- Step 1 – On the most basic level it makes sense to consider if the contractor cannot qualify for bonding the job at its current size. Maybe a contractor’s bond capacity is $500,000 for a single job, and the contract is $1,000,000. If the owner is willing to split the contract into two smaller contracts that run one after the other, phases could work. If only it were that easy.
- Step 2 – Some projects would not make sense to phase, and some owners or general contractors would not be willing to phase. For example, a contractor hired to build an auditorium at a school for $1.5 million, it would be difficult to phase the project into smaller pieces. This is because phasing of projects means splitting into separate contracts. When does one start and the other end on a large single structure like an auditorium? Warranty periods need to be considered as well – could the work that was completed in phase 1 effect work done in phase 2? If so, an owner is not going to phase. When would an owner consider phasing? When the project makes sense. For example, a roofer is awarded a $1,000,000 project for the reroofing of 3 schools in a district but the contractor only qualifies for a $500,000 single bond. This would be a scenario that makes sense to split the $1,000,000 contract into 3 separate contracts. It would be clear to the owner, surety, and contractor when each phase would be complete, since they are at separate locations.
- Step 3 – The project makes sense to phase and the owner is willing to phase. Now what? The owner needs to split the contract into two clearly separate contracts. From the description of the contract to contract price, the contractor’s obligations need to be clear. The contractor should consult their bond agent for guidance.
If and when a contractor is faced with a scenario when they cannot obtain a bond, they should consult their bond agent for options. At Surety 1 we have over 40 years of combined experience structuring contracts to help contractors obtain performance bonds. Contact us at firstname.lastname@example.org for a consultation.