For Industry Professionals, Managers, Trades & Suppliers
J. NORMAN STARK, ATTORNEY and REGISTERED ARCHITECT
JURIS DOCTOR, B. ARCHITECTURE, B.F.A.
17000 St. Clair Avenue . Cleveland, Ohio 44110-2535
Tel.: (216) 531-5310 . Fax: (888) 833-5860 . E-Mail: www.Normstark@aol.com
In Florida . 6500 Midnight Pass Rd. #105 . Sarasota, FL 34242 . (941) 349-2061.
Construction; Surety Bonds
Defaulting contractors are a sad statistic: 81,308 contractors failed in the United
States between 1990 and 1997, leaving liabilities of $21.8 billion. These failures were
not limited to new or small contractors; of the 10,867 contractors who failed in 1997,
one-third were in business for 10 or more years. $7.3 billion was paid on claims against
bonded contractors since 1985.
Definition: a surety bond is a three-party agreement whereby one
party - the "Surety" or "Bonding Co.", guarantees to another, the "Obligee" or "Owner",
that a third party "Principal" or "Contractor" will perform and timely complete a
construction project, according to construction documents prepared by the Architect or
Engineer, and/or administered by the Construction Manager.
Types of Bonds:
Whom does the bond protect? Primarily, the Obligee / Owner of the project, as follows:
- Bid Bond - provides financial assurance that the bid has been submitted
in good faith and that the contractor intends to enter into the contract
at the price bid and provide the required performance and payment bonds.
- Performance Bond - protects the owner from financial loss should the
contractor fail to perform the contract in accordance with its terms and conditions.
- Payment Bond - guarantees that the contractor will pay certain
subcontractors, laborers and material suppliers associated with the project.
- Maintenance Bond - covers defective workmanship or faulty materials
discovered after the project has been completed. In most cases the performance bond
covers defective materials and faulty workmanship for a specified period of time
after completion of the contract. However, maintenance bonds may be obtained
separately to cover both patent (observable) defects and latent (hidden) defects.
- Only qualified contractors, with the required financial qualifications will bid on the job.
- More competitive pricing; contractors and subcontractors know they have the protections of a bond,
backed by a reliable surety.
- Higher likelihood of timely project completion.
- Consistency and quality may be expected of the finished product.
- Warranty against defective materials and workmanship.
Protection for Contractor, Subcontractors, and Suppliers: Bonds may also provide protection
for the contractor and lower tiers of the construction industry supply chain:
Surety companies and, of course, contractors as well, want to avoid default, inasmuch as default avoidance is better
and less expensive than cleaning up the legal and financial entanglements after default.
- Surety can provide experienced technical, management or financial assistance to the contractor.
- If a contractor defaults, (and a payment bond is in place) the contractor is assured that
subcontractors, laborers and suppliers will be paid.
Many of the functions of a surety may benefit contractors either before or when they begin to experience trouble on a
project. For example, surety companies may arrange temporary financing for a contractor to meet payroll. This can be
done without notification to the owner, and saves good will and reputation developed over many years.
Sureties may also step into the contractor's shoes and take over the contractor's operations, to implement the
completion of the project, thus avoiding default.
Caveat: Due diligence mandates providing notice to the surety before problems on the project result in
AUTHOR / EDITOR: J. NORMAN STARK is an Attorney-at-Law, a Registered Architect, (AIA, NCARB) Registered
Landscape Architect, Interior Designer, Planner and Senior Appraiser (ASA), admitted to practice law before the Bar of
Ohio, the US District Courts, Ohio and Illinois (Central Dist.), the US Court of Appeals, and the United States Supreme
Court. He is a Mediator, Arbitrator and Litigator with experience in Business, Construction Law, and Public Works, and with
additional experience in Real Estate, Construction Attorney (Legal Project and Crisis Management), and as an Expert Witness
(Forensic Architect). His office is in Cleveland, Ohio.