Surety Challenge: Thorny Problem

Solve this real surety case:

A large subcontract has been awarded and no Performance & Payment Bond was stipulated. The sub commenced with the work but their major vendor is holding up the entire project – they want their purchase order (PO) “bonded.”

What are the possible solutions?

More details: The subcontract is for $4 million and the vendors purchase order is $600,000, about 15% of the subcontract.

What is your solution?

Some possibilities:

  1. Your idea:_______________________________________________________________________________
  2. Issue a $600,000 Performance Bond on the purchase order or maybe a Payment Bond
  3. Provide a P&P bond on the entire contract, or just a Payment Bond
  4. Use Funds Control to assure the vendor that their payments will be processed smoothly, without interruption.
  5. Use Joint Checks to assure that the sub cannot divert the vendor’s payments.
  6. Issue a new contract equal to the purchase order and provide a Payment Bond to the vendor.

Observations:

#2. Bonding the purchase order would be a financial guarantee obligation (pay money at a future date), very tough. Underwriters might want collateral.

#3. This is an impractical solution because the PO is such a small percentage of the subcontract – makes it appear extremely expensive (premium based on the contract amount.)

#4. Could work although the vendor has no recourse if the payments are held up.

#5. Same problem with joint checks.

#6. If the contract owner will agree to make these adjustments, it could be the best solution. A Payment Bond would be issued on the new contract and furnished to the vendor.

Was YOUR solution on the list? Let me know if you have one to add: sgolia@fiasurety.com

FIA Surety, your best carrier to solve “thorny problems.”
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Comments from reader:

Steve, This may touch upon your solutions #2 and/or #6, but I was thinking along the lines of issuing a $600,000 Advance Payment Bond covering the PO contract between the Sub (Principal) and Supplier (Obligee). A new supply contract covering the PO would likely need executed between those 2 parties, but not necessarily impact the existing contract between the GC and the Sub.

Golia reply:

OK, yes, good thoughts!

Couple of issues: While the advance payment bond would help the vendor, it would be priced and underwritten as a financial guarantee (tough) b/c the principal is paying the obligee, not the other way around (as on a P&P bond.)

A supply contract bond will have the vendor as the principal, so that will not satisfy their need.

Pretty thorny, right?  Actually this exact situation comes up from time to time.  If the PO amount is substantial in relation to the contract, issuing a Payment Bond on the entire contract could be the economical solution, then you just give a copy of the bond to that one vendor.  They should be happy to hold a bond that is for more than their PO amount.

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