Surety Bond Challenge: How Would You Respond?

Our agent asked this question. How would YOU respond? (Our answer at the end.)

Hi Steve, my client got a call from a township that is one of his past customers. There’s a project they want him to finish. The other contractor ran out of money and couldn’t complete the job.

The defaulted contractor thinks he is 95% complete, but it looks like there is more than 5% left to finish this up. There is also subcontract work that the township cannot evaluate. They are not sure what remains to be done.”

Your answer: __________________________________

This is a bit thorny. There are red flags and we don’t even know the size of the contract yet!

The first point is that this is a completion contract for the defaulted contractor’s surety. It’s not a normal township bonded project – like the client is used to doing. Does he have prior experience working for a bonding company? I don’t think so.

“Abbey Normal”

Secondly, if there is some question regarding the remaining work, how can he price it correctly? “Lump Sum” contracts are common in the industry. There is a set dollar amount to be paid. If it turns out to be insufficient to complete the work, the contractor faces a loss on the project.

Obviously there is much more to know about this, but here was our response:

  1. Generally, sureties are reluctant to issue bonds with another surety as obligee, can get too messy. This is an “abbey normal” situation. He could only offer to proceed with no bond on his completion contract.
  2. The client should avoid a lump sum contract because the scope of work is not clearly defined. A better choice would be a Cost Plus contract. It would prevent an unprofitable outcome.

No premium on that one, but at least we helped our agent and contractor.

Want this level of expertise on your next contract suretysite or subdivision bond? Call us!

Free CE Credits: 8/2/21 Ethics course. Info and register.

FIA Surety / First Indemnity of America Insurance Company
2740 Rt. 10 West, Suite 205
Morris Plains, NJ 07950
Office: 973-541-3417

An “A Rated” Carrier

We are currently licensed in: NJ, PA, DE, MD, VA, NC, SC, WV, TN,  FL, GA, AL, OK, TX

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