Month: April 2016

Secrets of Bonding #125: When to Call It Quits

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Construction contracts can be terminated by either party under certain circumstances.  Let’s take a look at it from the Contractors point of view.

Federal contracts make it easy for the government to end a project.  The “termination for convenience” clause spells out how the project can be ended (with no fault on the part of the contractor) and provides a method of payment for the work in place. Other public and private contracts may also contain this clause.

Sometimes it is the contractor who is motivated to end the project early. In these situations, it is important to know how and when to proceed.no-work

The Disputes Clause

“The Contractor shall proceed diligently with performance of this contract, pending final resolution of any request for relief, claim, appeal, or action arising under the contract, and comply with any decision of the Contracting Officer.”

Found in federal contracts, this clause means you must continue to work when facing a dispute. This assures that the contractor doesn’t hold the project hostage while the dispute is under review. 

Other public and private contracts may include language regarding unresolvable disagreements, so it is important to…

Read the Contract

Contractors should only quit a project when they have a legal right to do so.  You need to read the contract and, with the help of your attorney, choose a course of action.

An Unresolvable Disagreements clause may allow the contractor to stop work.  An example could be engineering issues that make it impossible to proceed.

Stop Work for Nonpayment

In these cases, the contractor should send written notification of the overdue payment and allow a time period to collect the funds.  Some contracts require that a second notification be sent before work may be suspended.

Because nonpayment may be a material breach of the contract, it can justify stopping work.  However, state laws vary on this subject.  An attorney can help determine if such action is advisable.

Surety Bonds

If a Performance and Payment Bond covers the contract, it can play an important role.

General Contractors should alert their surety regarding any disputes.  They should also remember that stopping work can result in a Performance Bond claim.  This can hamper the availability of bonds for other projects. The surety will want to understand the dispute and may offer guidance to the contractor and attorney.

Subcontractors have these same issues if they have bonded their subcontract.  In addition, contracts with “pay when paid” wording may justify the GCs nonpayment – another reason to read the contract.

An advantage for subcontractors may be a P&P bond above them, filed by the general contractor.  This Payment Bond is available for claims by subs and suppliers.  It can be a powerful tool to protect subcontractors.  Even a letter to the GC threatening to file a payment claim can shake the money loose in some cases.

Conclusion

Stopping work can be an important remedy for the contractor, providing the action is legally permitted.  When a contractor considers suspending work they must weigh the risk that they may ultimately be found in breach of contract themselves.  On the other hand, the larger situation of the nonpaying party may demand action, such as an impending bankruptcy.

The best approach is to review contracts in advance and negotiate the addition of language that allows work stoppage under appropriate circumstances.  The goal is to acquire the contract while limiting the risks.

Note: we are not attorneys and are not giving legal advice.  If you have a project dispute, call your attorney for help.

FIA Surety is a NJ based bonding company (carrier) that has specialized in Site, Subdivision and Contract Surety Bonds since 1979 – we’re good at it!  Call us with your next one.

Steve Golia, Marketing Mgr.: 856-304-7348

First Indemnity of America Ins. Co.

Secrets of Bonding #124: Underwriting Challenge – What’s Wrong With This Picture?

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Years ago when I was just a cub reporter for the Daily Planet, I mean surety underwriter, I ran into a strange situation that was recently repeated.  In this article we will present the scenario and ask you to use your underwriting judgement. The question is… “What’s wrong with this picture?”

Scenario #1

Originally this came up on a Lost Instrument Bond.  These are needed when requesting the issuance of a duplicate cashier’s check, security, or other financial instruments.  The applicant claimed a negotiable instrument (anyone holding it could potentially cash it in) had been inadvertently destroyed. He was a young adult in his 20’s who had inherited the asset.  His financial statement showed little other than the asset in question, which was a problem because the underwriters do not want to feel that the person has a reason to fraudulently convert the “lost” asset and it’s replacement.

We wrote back and expressed the underwriting concern, that the applicants financial position was inadequate.  In response we received a novel proposal: When the replacement instrument is issued, it will be conveyed directly to the surety who can hold it as full collateral against their exposure, until the bond is released (years!) “There will be no risk to the surety.”  Sounds pretty good? 

In my infantile underwriting mind I thought this sounded intriguing, but it also made me uncomfortable. Why had I never heard of doing this before? Maybe I was on the verge of creating an entirely new underwriting procedure.  Will they name it after me?

What was wrong with this picture?

Scenario #2Whats_wrong

In the more recent situation, the surety was being asked to support a multi-million dollar purchase transaction.  The applicant (a person) was a foreigner, an accomplished business person, who was not familiar with surety underwriting requirements.  They were not accustomed to providing personal financial info or involving the spouse in business obligations.

As a way of supporting the transaction, and maybe dodging the indemnity requirements, it was suggested that title to the purchased property would be conveyed directly to the surety (sound familiar?).  After the financial transaction (which was the subject of the surety guarantee) is completed, the surety will be released, the title will be transferred to the buyer, and “the surety will never be in a position of risk.” Boom!  Let’s do it!

What’s wrong with this picture?

The Answer

Here is good advice.  If your underwriting brain feels like something is wrong, it probably is!  The problem with both these scenarios is the timing.  

Bonding companies ALWAYS secure their position before assuming an obligation. It is incumbent on the underwriters to protect their company assets and its owners by doing so. 

Think about bank lending practices, which are not unlike surety underwriting.  Would a bank make a building loan relying solely on the future value of the project? No, they require being secured with sufficient assets in advance such as the company and personal net worth of the applicant and possibly other collateral.

Financial obligations always require that the credit grantor be secured in advance. Prudent decision making requires this.

So the next time you see something that doesn’t feel right, trust your gut.

FIA Surety is a NJ based bonding company (carrier) that has specialized in Site, Subdivision and Contract Surety Bonds since 1979 – we’re good at it!  Call us with your next one.

Steve Golia, Marketing Mgr.: 856-304-7348

First Indemnity of America Ins. Co.

Secrets of Bonding #123: Who Was Edward Aloysius Murphy, Jr. (& Why Contractors Should Care)

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(January 11, 1918 – July 17, 1990) An American aerospace engineer who worked on safety-critical systems for the U.S. Air Force. He is best known for his namesake Murphy’s Law, which  states, “Anything that can go wrong will go wrong.”  Murphy regarded the law as crystallizing a key principle of defensive design, in which one should always assume worst-case scenarios.Murphys_Law

Keeping Major Murphy’s principle in mind, what are the critical steps contractors can take to get their projects off on the right foot, and bring them to a successful conclusion – while keeping Murphy’s Law out of the equation?

The first key to having a successful contract is to have a contract. It sounds obvious, but contractors are sometimes induced to start work, or perform change orders / additions to contracts, without an executed document in hand.  Maybe the project owner is in a rush, “We need for you to start right away so we can be completed on time.  We’ll do the paperwork later.”

The contractor wants to maintain good will.  They proceed in the hope that their responsiveness will pay off – and sometimes it does.  There are also times when the contractor incurs costs that are never reimbursed because the contract is not executed.  There could be engineering problems, governmental interference or lack of funding. There are any number of reasons for things to go wrong (as our hero indicated.) And for the contractor, they are all bad.

murphyslaw

On the other hand, let’s say there is no problem with the contract.  The paperwork is signed, the work proceeds, is paid for, and the contract is completed with a profit in hand. Is that the end?

No, not quite. Just like there is paperwork to get into the project, there is more to get out of it.  The contractor should obtain written acceptance of the work by the job owner (obligee.) 

  • This important document establishes a completion date for the contract and concludes a portion of the liability that is attached to all open contracts.
  • It will close the Performance and Payment bond if there was one. Closing the file restores the contractors bonding capacity. 
  • It may also be beneficial with lenders.
  • If nothing else, a written acceptance may be a defense when the project owner attempts to call back the contractor at a later date or claim the work was not satisfactory.

Edward_MurphyThese simple procedures are basic, good business practices. Contractors who win work competitively, and are paid under a lump sum contract, already face significant risks.  It is important to have the correct paperwork in hand when starting, modifying, and ending construction projects. 

Major Murphy learned this important lesson the hard way – but you don’t have to! 

FIA Surety is a NJ based bonding company (carrier) that has specialized in Site, Subdivision and Contract Surety Bonds since 1979 – we’re good at it!  Call us with your next one.

Steve Golia, Marketing Mgr.: 856-304-7348

First Indemnity of America Ins. Co.