-Partners in Practice -

For many of us, sureties are among those unseen players out there who somehow affect the shape of our lives. They share something in common with the Gnomes of Zurich. Few mortals know what they really do or how they do it; even fewer know how to evaluate the outcome.

From the perspective of the design team, sureties seem to surface only when a project is in deep trouble (and then only as part of the problem, not the solution). Their vexatious behavior seems to compound conflict- adding to the threat of costly, time consuming, and frustrating litigation.

From the perspective of the surety, this is less than fair. It fails to take into account the value to all concerned of the unseen services the surety provides. It focuses on the few instances which erupt into conflict, rather than the many in which the surety serves as a stabilizing force in an otherwise volatile and unpredictable environment. The surety's perspective is worth a closer look, for when the system works well, everyone benefits .

A bond is a guarantee. Its purpose is to facilitate commerce-to make possible decision; making that might otherwise be paralyzed by the specter of inordinate risk. Bonds reduce financial uncertainty.

In the construction industry, separate bonds are written 1) to guarantee the performance of the contractor and 2) to guarantee the payment of monies due suppliers of labor, materials, and equipment. Performance and payment bonds, although independent instruments, are normally written in conjunction with one another. Together, they provide the owner with a degree of assurance that the project will be constructed for the agreed upon price, and that it will be turned over free of both defects and liens.

Historically, payment bonds evolved to provide financial protection to suppliers of goods and services on public projects. They were intended to serve as a substitute for the protection of the lien laws (which generally do not apply in the public sector). Today, payment bonds are used on private, as well as public projects, and they afford subcontractors a means of recourse that is less cumbersome than meeting the legal requirements necessary to perfect a lien.

Indirect advantages also accrue as a result of the surety's presence in construction. They have a value which is difficult, if not impossible to calculate. When they are realized, something adverse does not happen, and the absence of adversity frequently goes unnoticed. The hidden benefits are there, nevertheless, and they are worth noting.

Benefits to the Owner. Underwriting standards differ from one surety to the next, but all exercise extraordinary caution. The primary objective is to avoid default. The first line of defense is a carefully-honed ability to screen out the underfinanced, the disreputable, and the incapable. By prequalifying contractors, through close scrutiny of their financial strength, management practices, expertise, and capacity to complete the work, sureties lend support to the common goal of getting the job done on time and within budget. Later, during construction, the surety will monitor progress and track unrelated work for signs of overextension. Should these precautions fail, it will frequently step in with financial and management resources in an effort to resolve problems and keep the project moving toward completion.

Benefits to the Contractor. The surety is an important source of independent expertise and support. It will advise the contractor on the terms and conditions of the construction contract and verify that the owner has adequate financial backing to meet the payment schedule. Should the unexpected occur during construction, loss of key personnel or essential credit, for example, the surety will often deliver technical assistance, direct financial aid, or the guarantees necessary to restore a cash flow adequate to enable the contractor to make good on his commitments. Where these services prove to be effective, they can make the difference between a potential disaster and a successful outcome.

Benefits to Subcontractors. No one is more concerned about the rhythm and continuity of work in progress than the subcontractors whose profits depend on their ability to get in, get the job done, and get out. To the extent that the surety contributes to maintaining the flow of the work, losses can be avoided. To the extent that a payment bond reduces the credit risk subcontractors face, they can prepare their bids with greater certainty, and they can perform their work knowing they will have recourse in the event something beyond their control should cause the contractor to default.

Benefits to the Design Team. Everyone wins when the efforts of the surety to protect its own interests in the financial stability of the contractor are successful, for the chances that the project will end in conflict are significantly reduced. Everyone suffers when a contractor goes under. The project is delayed, costs soar, and the likelihood of litigation escalates. Should default occur, the surety's role is to complete the project with minimum delay and additional expense. Its obligation to do so includes payment of any additional costs incurred, including any additional design fees necessary to get the project back on track. Its principal focus, at least until the job is finished, tends to remain fixed on getting it done.

Nothing is perfect in an imperfect world. In an undertaking as complex as a construction project, with players from diverse backgrounds called upon to perform a task unlike any that has gone before, some things are bound to go wrong. Performance and payment bonds cannot cure every ill, and the project itself, replete with opportunities for misunderstanding and human error, cannot be fully guaranteed.

The surety is responsible in the event the contractor defaults or fails to meet his financial obligations to subcontractors and suppliers. The surety is not responsible for losses arising from other causes, and where possible, it will seek to recover those losses by tracing them to their source. Therein lies the familiar problem, for when conflict erupts in the construction arena, far more is arguable than is clear. As a result, far more has ended in costly litigation than one might hope.

Recognizing that at least some past conflicts over the responsibility of the surety might well have been avoided, a coordinated, industry-wide effort was initiated in the mid-1970's to revise the standard bond forms. The purpose was to clarify the rights and obligations of the parties for the benefit of all who held an interest in them. The outcome? Major revisions to the AIA and the EJCDC forms were introduced late in 1984. Whether these changes will reduce litigation in the future remains to be seen, but we will examine the effort to achieve this goal in a forthcoming Part II.

For inquiries or problems please contact us via e-mail at Earleen Thomas or call us directly at 800-705-7742.
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