Green Building.....requiring bonding?

My law buddy Chris Cheatum, originally of KC who practices in DC tells me DC "green" construction requires now the posting of bonds to ensure performance with sustainability standards. Obviously this impacts owners, contractors, designers, insurers, and lenders...... Get ready folks.....our global warming friends will require new standards for contractors!

Additional thoughts about a recent Surety Overview

An article in the November edition of The Construction Executive (page S32) points out how sureties "scorecard" contractors...by determining whether a contractor (a) knows their surety, (b) understands the difference between state v. "adjusted working capital\liquidity (AR's more than 90 days, insider notes, disputed assets and restricted cash are excluded), (c) understands stated v. "adjusted" equity net worth ((goodwill, intangibles and assets above cost are excluded) seem to be just some of the issues sureties look at....

How about the number of times you are involved in a lawsuit and the results of the lawsuits?

Surety Overview

The November edition of The Construction Executive showcases a very well written overview of the surety industry. Well worth the read...the thoughts of the industry experts are what all contractors should pay attention to...one interesting thought...an author of one of the articles indicates that some CPA's have hurt their clients by seeking to avoid paying taxes, thus hurting their bonding capabilities. Does this approach take into account the differences between an "S" and a "C" corporation?

Default insurance vs Surety Bonds

ANOTHER GREAT COMMENT...THIS ONE FROM MIKE, A SURETY BROKER....

"At first glance default insurance looks like a good less expensive alternative to surety bonds.  While the SIO is obviously going to be bias to suretyship, I believe they bring up some great points as to why surety is still the best choice.  On their site they state:

"While contractor and subcontractor default insurance products are marketed as "cost effective alternatives to traditional performance and payment bonds," they provide minimal protection to contractors against default and offer no protection to subcontractors, laborers, or suppliers. A typical contractor or subcontractor default insurance policy is a two-party agreement between the insured (the owner or contractor) and the insurer. The policy reimburses the insured for a "qualified loss," which usually is defined as the costs and expenses above a certain amount the owner or contractor must pay as a result of contractor or subcontractor default.

You should be wary of these products. If the covered contractor or subcontractor defaults, you have no right to file a claim directly with the insurer."

Even with their bias to surety bonds, there is no denying the facts of what is covered and what rights one has.  Surety bonds will be around for quite some time to come."

MIKE...I AM IN COMPLETE AGREEMENT!!!

Subcontractor Performance Bonds

Has anyone tried a subcontractor default insurance (SDI) in place of a performance bond? I have not seen it in use as of yet.....sounds like it might be cheaper, but will it give the protection a GC is seeking?

Common Law Bond?

Yes...one that does not meet with the strict compliance of the law. As Patrick C. Barthet points out in his article in the recent Associated Builders and Contractors magazine (page 70, June edition).....in Florida the courts will impose a minimum standard in reviewing the statute and the language contained in the bond (Florida Keys Community College v. Insurance Company of North America). This might also extend the statute of limitations from one year under the or less by statute to five years....hmmmmmm...the bond is less than compliant with the statute on bonds...and you win by extending the statute of limitations for asserting a claim???...hmmmmmmm

Enforcing the 45 Day Response Requirement-"Sureties Beware"

In a recent article in Construction magazine (December 2004), it was again pointed out under A312 a surety must respond to a subcontractor within 45 days after receiving a bond claim. Typically a contractor would have to file legal proceedings. Now with the decision of National Union Fire Insurance company of Pittsburgh vs. Wadsworth Golf Construction Company of the Midwest d\b\a Wadsworth Golf Construction Company, we have the basis to claim that if the same is not undertaken, the surety will lose all of its defenses to a subcontractor's claim. What is a surety to do? Respond or phase out the provision! Contractor's need to stay on top of matters for possible new claims to assert against sureties.

Suit Against A School District

Bad news revisited for subcontractors--as stated in the Construction Litigation Reporter for February 2005, a new case out of Alaska stands for the proposition that a subcontractor cannot sue the school district where the school district failed to require a bond of its general contractor. This case follows the majority rule that "absent explicit statutory language, violation of the Miller Act or state analogs does not give subcontractors and materialmen a private right of action against the public entity." This rule is discussed in greater detail at Little Miller Acts: Liability of Public Owners for Failure to Obtain Payments Bonds on Public Construction Projects, 14 Construction Lawyer 7 (October 1994).

Miller and Little Miller Act

A refresher course on the Miller Act found on the National Lien and Bond Claim website:

The Miller and Little Miller Acts
by Tara Moran
Emalfarb, Swan, & Bain

Before signing on to any public project, the subcontractor must inquire as to whether a payment bond exists and whether the terms of that bond encompass the subcontractor's contributions to the project.

The traditional mechanic’s lien is not available as a remedy under government-owned construction projects. To protect themselves from non-payment by a prime contractor, subcontractors and suppliers must rely on the federal Miller Act for federal-owned projects and the state Little Miller Acts for state-owned projects.

The federal statute, known as the Miller Act, requires a payment bond to protect those who supply labor or materials to a contractor on a federally-owned project. State governments have enacted similar legislation to protect labor or material suppliers on projects owned by other public bodies, often referred to as Little Miller Acts.

The Miller Act requires two different bonds to be posted by the prime contractor: a payment bond, which guarantees payment of a prime contractor’s obligations by shifting the risk of nonpayment from the subcontractors to the surety; and a performance bond, which protects the government against the prime contractor’s failure to complete the project. The failure of the government to require a performance bond is of little consequence to the subcontractor. However, the failure of the government to ensure that there is a payment bond can leave a subcontractor with very few options if the prime contractor fails to pay. Although it is a requirement in the Miller Act, courts generally do not hold the government liable for the failure to ensure that a payment bond exists. Therefore, prior to signing on to a public project, a subcontractor should always be sure that a payment bond has been posted, and that it understands the terms of the payment bond, including the extent of coverage available and any notice requirements.

A Miller Act payment bond protects those who supply material or labor for use in the performance of the prime contract and who have not been paid. However, its protection extends only to those who supply labor or material directly to the prime contractor and to those who supply labor or material directly to a subcontractor of the prime contractor. Suppliers to suppliers, for example, are not protected. Accordingly, a subcontractor should always determine its tier in relation to the prime contractor, in addition to obtaining a copy of the payment bond.

With respect to the Little Miller Acts, although they are fashioned after the federal Miller Act, they do vary quite extensively from state to state in the protection that is offered. For example, many Little Miller Acts narrow the scope of affected public contracts, raise the threshold contract amount or revise the notice requirements. It is important, therefore, that the subcontractor never assume that a payment bond exists on every public project, whether it is a state or federal project.