Performance Bonds in Construction – What to do if You Have a Problem on a Bonded Job

Construction Surety is a relationship business in which sureties strive to have close contractor relationships, historically underwriting the three Cs: Capital (financial capability), Capacity (operational capability) and Character (capability to hang in there when the chips are down, in short: integrity). These three Cs include both objective and subjective criteria. Contractors are often asked to continually update sensitive information, including business and personal financial information and tax returns, organizational succession plans and other information so that sureties may understand how the contractors run their businesses and how they think. Likewise, contractors strive to understand the parameters of their surety programs and the consistency of their applications, essentially trying to understand how the sureties think. This process can be difficult, but contractors’ agents are instrumental in facilitating this relationship between the two parties.

Contractors exist in, arguably, the most competitive business market, particularly in the present economic environment. There are a significant number of bidders on projects, resulting in ever decreasing gross profits and, therefore, no room for errors. Owners of projects seem to be pushing more and more responsibility to contractors, creating more and more onerous contracts and thereby increasing risks for contractors. How many businesses exist where the business and its owners personally place everything on the line for a few percentage points of profit?

When trouble occurs, it can originate from various sources, such as unforeseen site conditions or poor contract documents, but no matter where the source, trouble inevitably results in a stress on cash. Contractors usually know when trouble brews, and they certainly are aware of issues well before they make their way into the Interim Financial Statements. Now, if contractors and sureties have close relationships, contractors should be confident enough to discuss trouble with their sureties and not surprise their sureties with negative news when the next round of Financial Statements are produced. Your surety will be sure to take that proactive communication into consideration (remember one of three Cs: Character). As with any problem (business or otherwise), if trouble is acknowledged early, it may be resolved early.

How can sureties help? After meeting and discussing the trouble with their contractors, sureties can mobilize legal, engineering and financial experts to hone in on the problems and offer potential solutions. Sureties often have these resources available to help resolve issues and assist with affirmative and defensive claims. Sureties may decide to provide financial support, which could result in vendors resuming supplies to projects which were previously cut-off, reducing impacts to schedules and the resulting liquidated damages. Though the costs of sureties’ actions are often ultimately borne by contractors, experience dictates these costs often pale in comparison to the costs contractors will bear if they delay in addressing trouble or attempt to go it alone.

I would like to offer a real life example. Many years ago, Surety enjoyed an excellent relationship with a Contractor, which was constructing the HVAC for a stadium. All parties knew that the stadium would be built on time to host the scheduled events and the General Contractor had Surety’s bonds and remaining contract balance as security to make that happen, and General Contractor made Contractor and Surety well aware of that fact.

The Contractor’s individual owner was of the finest character. When he discovered there were operational (and then financial) issues, he immediately acknowledged these issues and called Surety. Surety then assembled the necessary engineering, financial and legal resources. Through these resources, Surety determined that the issues stemmed from poor contract documents and drawings on the stadium project. Surety assisted Contractor to complete the stadium and other projects by providing its resources and still continued to issue Contractor surety bonds. Contractor certainly helped himself by declaring himself “all in” by providing Surety with proceeds from his retirement plan, among other personal assets. At the end of the day, not only did Surety get repaid, but Surety enjoyed an ongoing relationship with Contractor, which subsequently rebuilt itself to the financial position where it previously was. Additionally, many of Contractor’s employees remained employed without upsetting their families.

Had Contractor not acknowledged the issues and not called on Surety to proactively address the problems, Contractor would have exhausted its resources, still not met its contractual obligations, General Contractor would have called Surety’s bonds and Surety would have sustained a larger loss without the opportunity to mitigate losses. Additionally, Surety would not have been comfortable with its relationship with Contractor and may not have continued its joint surety program.

While it is not ideal for contractors to sense business troubles, the problematic situations may resolve ideally if contractors are proactive, like Contractor was in this scenario. After all, Contract Surety is a relationship business. Contractors and sureties should maintain close relationships, and contractors should communicate with their sureties when they first sense that trouble is brewing. Then, like The Beatles, we can all “get by with a little help” from our friends.