Who is who? What's the difference between an agent, underwriter and attorney-in-fact?

Sandi Benford
Vice President, Surety Division
Philadelphia Insurance Companies

The relationship between an agent, a surety company and a construction contractor can be confusing to the uninitiated.

Let’s start with the basics. An owner approaches you for a construction project and they require a surety bond. Securing an agent is step one. Agents are licensed and trained to advise surety bond seekers and match them with insurance companies that provide surety bonds.

A surety underwriter is an insurance company employee who analyzes the risk of approving a surety bond. The underwriter makes the decision to provide bonds to an owner on behalf of the construction company seeking them.

One might then think the agent works for the construction firm requiring bonds, but the agent’s role is more complex. That complexity lies in the term that follows an agent’s signature on any bond: attorney-in-fact.

An attorney-in-fact is an individual who is legally empowered to act on behalf of another person or entity—in this case, the surety company. That relationship goes beyond the signing and execution of bonds. It starts with the pre-qualification process and continues long after a surety bond is issued.

The relationship with the agent is perpetual, requiring issuance of modifications to the initial bond, and providing additional bonds if needed.

The agent, who assumes fiduciary responsibility as attorney-in-fact, must adhere to a code of ethics prescribed in the fiduciary duty to both parties—the surety company and the construction company. For surety notification, this includes any information that could reasonably be construed as negatively impacting the completion of the bonded contracts. For the construction company, this includes financial strength deterioration of the surety company or material changes in surety staff or underwriting approach.

It’s important to maintain proactive communication with your surety agent and underwriter to ensure these important business partners bring more than just a bond to the table.

What key elements should contractors consider when implementing a change-order management strategy?

Henry W. Nozko, Jr.
President
ACSTAR Insurance Company

Projects that make the most profit on change orders might be the projects that have no change orders. Many construction customers (owners, architects and construction managers) operate under the general impression that contractors gouge everyone on change orders. Occasionally, a very profitable change order may arise but, overall, it can be argued that contractors might make either little or no profit or even lose money on change orders. Owners and construction managers have sophisticated pricing mechanisms that don’t take project specific difficulties into play, forcing contractors to settle for less than an adequate amount to recover all costs.

Even worse, contractors often unwittingly wind up performing change orders for free because field personnel may not compare the contract documents to field conditions or may perform work in the field without the contract documents. That leaves the chances for identification and payment of changes improbable.

Change orders may extend project duration. The contractor may not recover extended home office and field office overhead or may not receive sufficient additional days in the project schedule resulting in possible delay damages or other unrecovered expenses. Under such circumstances, projects with no changes may be better than projects with changes.

Establishing a doctrine of awareness, concerning change-order philosophy, could improve profitability. Adapt an ongoing dialogue with all levels of field personnel about reviewing contract documents and identifying changes in the field. With most construction cost information systems, cost-coding related to specific changes is available. Constant communications about the process will establish a culture about contract changes that could result in a meaningful contribution to profitability.

The push for all-digital bonding due to the pandemic has caused many obligees to accept electronic bonds. What is the future of electronic bonding?

Mark Munekawa
President
National Association of Surety Bond Producers (NASBP)

The surety industry has been transitioning to electronic bonding gradually. Recent advances in technology and the need for greater efficiency have incentivized some to begin that transition. Bond obligees and contractor principals also needed to develop comfort around bonds in electronic or digital form. The unexpected advent of the COVID-19 pandemic, however, changed the urgency of moving towards electronic bonding, as concerns for health and safety became paramount and remote workforces made physical production and delivery of bonds all but impossible.

Frankly, paper surety bonds with wet ink signatures and raised, impressed seals are out of keeping with the pace of modern business practices and are not necessarily needed to evidence legally enforceable surety contracts.

Most, if not all, jurisdictions have adopted laws that make electronic signatures legally valid. Further, a number of jurisdictions have or are reviewing and amending their notary laws to permit remote online notarization. In the commercial surety realm, mortgage broker bonds and customs bonds, among other bond types, regularly are produced and delivered digitally.

There are no good reasons to go back to the days of paper-and-wet-ink signatures on bid, performance and payment bonds; digital is the future of surety bonds, and owners, contractors, producers and sureties now have all of the incentives in place to move more rapidly toward that end goal.

Al Wright
SVP, Middle Markets - Contract Surety
Crum & Forster

The advent of the widespread use of electronic bonds ensures surety’s continued presence within the greater financial community and increases the industry’s ability to compete with other credit instruments, such as letters of credit. In a time when pertinent underwriting information can be gathered and transmitted instantaneously, and formal underwriting approval communicated at the touch of a keypad, it is imperative that our end product reach its client base in a fast, repeatable and scalable manner. In much the same way as checks, credit cards, wire transfers and crypto-currency have transformed banking and played a major role in increasing the velocity of money; electronic bonding will set surety down a similar path.

Electronic bonds dramatically raise the level of sophistication needed to successfully commit surety bond forgery and virtually eliminate the issue of unauthorized bonds. These factors are key in providing a more stable/dependable product to our clientele. In addition, a noticeable reduction in overhead should result from this initiative as well as increased efficiencies. Automation, in general, will serve to energize the surety industry and electronic bonds may be just the catalyst to “jump start” us into a new era of automation, placing our industry more solidly into the 21st century.

What are “consequential damages,” and how can contractors evaluate this risk?

Dan Pope
Regional Vice President, Southwest Region
Old Republic Surety Company

Consequential damages, in a construction contract are a bit of a wild card. In many states, consequential damages are enforceable even if the contract is silent on consequential damages. So, consequential damages should be addressed within the terms and conditions of the construction contract.

Because consequential damages are derived from a primary default under the contract, damages cannot be quantified until the primary default is known. Assigning a value is difficult. For a project owner, damages include loss of use or the increased cost of financing at the time of the default. For the contractor, it may include reputational loss or impaired bonding capacity. Third-party interests may also be claimed as consequential damages. At estimating time, the scope of consequential damages is unknown.

To avoid the wild card in a contract, consequential damages may be evaluated and managed as follows:

• a mutual waiver of consequential damages;
• narrowing the definition of consequential damages in the contract to specific categories of loss; or
• capping consequential damages to reasonable percentage of the contract price and/or a fixed maximum dollar amount.

If consequential damages cannot be waived, capped or narrowed in the contract, take a broader view. Consider the project characteristics in pricing the risk:

• number of stakeholders;
• intended use;
• whether the financing impact is by delay or default; or
• whether it is integral to a larger program of construction.

The greater the number of stakeholders and complexity of the project, the greater the possible consequential damages. If the project owner is unyielding on risk mitigation strategies, a contractor must carefully consider if the project is within its risk tolerance. If the project is bonded, the contract terms should be discussed with the surety.

A well-reasoned approach to risk mitigation inclusive of consequential damages will increase the comfort level of the surety with its own risk under the bond.

How do you think the pandemic will permanently change the construction surety bond industry?

Brock Masterson
Senior Vice President, Construction Group Director, Construction Surety
Chubb

Personal relationships and interactions are a cornerstone of lasting and successful partnerships between the surety and contractor. Regular in-person meetings offer the opportunity for underwriters and contractors to build the rapport and trust necessary to facilitate the surety relationship, particularly through volatile times such as what we have experienced this year. With that being said, the immediate and dramatic change to our way of life caused by the pandemic has allowed for widespread adoption of new tools and technology across our businesses.

Videoconference meetings have become standard operating procedure for companies and individuals in all demographics and levels of technological proficiency. While a videoconference may not always be the best tool for building strong business relationships, it does offer speed, efficiency and flexibility to share information in a fraction of the time that a standard meeting requires. Instead of underwriters traveling across the state or country for a single meeting—incurring costs that could include airfare, transportation, hotels and meals—the videoconference has become an attractive and cost-effective alternative that, when used selectively and appropriately, allows underwriters to engage with customers more than ever before.

Separately, with many sureties, contractors and project owners moving to a work-from-home environment earlier this year, electronically executed documents have gained more widespread acceptance with stakeholders that may otherwise generally have been more reluctant to embrace.

Contractors and sureties have proven to be resilient throughout the pandemic. The skills that have been necessary to maintain viability in the downturn will prove to be invaluable assets as the economy begins to improve.

Antonio C. Albanese
Vice President – Head of Surety
Nationwide Surety 

I believe the changes will be three-fold. First, electronic bonds, powers of attorney, contracts and other supporting documents to become more widely accepted as state, federal and local government agencies—as well as private owners—transition from requiring original documents. Wet-ink signatures and embossed corporate seals will be replaced with electronic signatures and may eventually lead to the elimination of notarized signatures. In the future, sureties will increasingly rely on third-party verification.

On the operational side, sureties and their clients will reduce their real estate footprints as they reflect on how successful the work-from-home model was during the pandemic. Remote work or a hybrid remote/onsite approach will become commonplace. Companies may experience challenges assimilating new employees, training and developing their workforces, mentoring up-and-coming professionals and maintaining corporate culture, but businesses will find ways to adapt.

From an underwriting perspective, there will be a greater focus on contract delay provisions. While surety underwriting fundamentals have always been extensive and contemplate many different risk scenarios, currently there is a renewed emphasis on this area, including force majeure clauses.
While this was something underwriters considered in the past when underwriting a particular case, the pandemic has underscored the importance of factoring in these provisions.

As a result, underwriters will be much more influenced by these clauses. In fact, we have already started seeing them included in underlying contracts and in some surety bonds.

Andrew A. Dickson
SVP, Head of Surety
Hudson Insurance Group

Due to COVID-19, the events over the past six months have been unprecedented. Many industries will change permanently, and surety is definitely one of them. Despite some firms’ advantageous use of PPP funds, the number of quality construction companies will drop, while the focus on construction materials and services will be intensified. We expect stress in commercial building and less premium as a result of the reduced need for office space, as well as decreased public work budgeted due to diminished tax revenue.

The market will experience continued insurance company consolidations, coupled with the challenge of most employees now being remote. Also, original signatures on bonds, powers, indemnity agreements and other legal documents will be less prevalent as we move towards electronic solutions.

One constant during this season, however, will be underwriting fundamentals, which are timeless. We believe the surety companies will continue to look for opportunities to support construction firms that have a sensible long-term game plan, and are dedicated to consistently and successfully executing profitable jobs.

It is wise to partner with a strong nationwide surety company that understands your needs and can readily weather the different business cycles. Both the surety company and the producer are integral allies and must remain steadfast in advising and growing with the construction company during this unprecedented time.

Daniel Fitzgerald 
Vice President Surety, Americas
Tinubu Square

The world changed dramatically with the advent of the COVID-19 pandemic. Organizations, such as sureties and construction firms, are now operating in a “new normal.” As a result, there are now new challenges, obstacles and problems to assess and manage.

Those same uncertainties, however, will produce significant new and unforeseen opportunities in the marketplace.

Which organizations will be positioned with the necessary capabilities and insights to navigate this rapidly changing environment? Companies that are positioned with the necessary “change management” agility will be market winners. An old tried and true sports axiom states that “speed kills.” In a COVID-19 world, that extends to the competition.

The key to success in these difficult times lies within the proper application and implementation of advanced technologies such as blockchain, AI, smart APIs and next-generation analytics all working in concert to improve and enhance “mission critical” work processes.

The good news is that technology is now available to extract actionable intelligence and information from varied internal and external data sources in real-time, producing a significant market advantage. Additionally, solutions are available to facilitate and enhance a surety’s self-servicing capabilities for important stakeholders within the surety ecosystem such as underwriters, internal business teams, agents/brokers, etc., resulting in an improved customer experience for key customers such as the construction firms themselves. All of this can be accomplished with performance gains and reduced costs.

Those possessing integrated communications that enable "state of the art" decision-making, coupled with streamlined business processes, will reap the benefits in this challenging environment.

The "window of opportunity" is here to affect a positive change for the future. But this requires organizational commitment and financial investment. The time to act is now.

Richard Hallett
Principal, Director of Surety
Marsh & McLennan Agency

Looking back—I have been transacting surety business in the bubble since March, as many say the "new norm.” Now, nearly seven months has passed, it is clear remote work is not going away and our business continues to evolve at a rapid pace. Change has accelerated, and we are reinventing the way we are doing business within all facets of the economy. Organizations are flatter, working smarter and more efficiently.

COVID-19 has broken down traditional delivery systems and new risks have emerged. Sureties are particularly focused on supply chain and material procurement. Recently, I experienced a client change their source for a major building component from an Asian supplier to a manufacturer in Southern California. The prospect of a delivery delay coupled with political tension in the region was enough to pivot to a new vendor within weeks of NTP. I see a renewed focus on nationalization versus globalization, something not seen in many years.

Sureties and brokers have streamlined underwriting and the delivery methods of bonds. The industry has worked for years lobbying for electronic filings with mixed success. The acceptance of e-bonds is now a reality. Since the outbreak, the process of securing the indemnity agreement between surety and contractor has changed with the acceptance of DocuSign. The days of exchanging the agreement between shareholders, spouses and notaries have been eliminated. A multiday process can now be completed in a matter of minutes, allowing for bonds to be executed more quickly.

While great strides are being made to improve transaction flow, sureties are reviewing their portfolios with greater vigilance and demanding regular dialogue with their clients. Contractors need to be prepared to answer more frequent questions regarding their current financial position and process for addressing emerging risks.

What terms should contractors include in all contracts going forward in light of the pandemic?

Brendan Schriber
Vice President, Surety
IFIC Surety, a member of IAT Insurance Group

One lesson I think we all have learned in 2020 is to expect the unexpected. Now is a great time for contractors to sit down with their legal counsel to reassess contract language. COVID-19 has shown us the numerous implications that an unexpected event—such as a global pandemic—can have on a construction project. Supply chain issues, inability to access jobsites, a depleted workforce and government restrictions are only a few of the issues suddenly hitting the construction industry.

Force majeure language, likely an afterthought in many contracts until this crisis took hold, should be a key component of contract forms moving forward. While the term “force majeure” may not be included, language addressing delays and time extensions is a must in future contracts.

Clearly stating that COVID-19 and other potential pandemics are covered events under these contract clauses is a good place to start. Outlining allowable time extensions or equitable adjustments to the contract price (or both) would further remove uncertainty from the contract. The impact of a local, state or federal shutdown on a contractor’s obligations under the contract terms should also be addressed. Language addressing termination clauses, notice requirements, excusable delays, “pay when paid” provisions and alternate procurement methods should also be included when possible.

While the contractor is not responsible for drawing up the contract in many instances, they need to make sure they are not settling for contract language that is placing the outsized risk on their firm.

Steve Dorenkamp 
Vice President/Claims Manager
Merchants Bonding Company

As the pandemic impacted the United States, force majeure clauses became a relevant topic as construction project owners and contractors considered potential impacts of COVID-19 on existing projects. Force majeure clauses are meant to excuse construction delays on projects due to unforeseen circumstances beyond the contractor’s control. It is important to specifically include pandemic language in the clause.

Less often discussed are escalation clauses, which allocate the risk between the contractor and owner when the cost of material or labor increases during a project. It would be beneficial for contractors to include escalation clauses in their contracts to help offset the financial burden of unexpected cost fluctuations for potential pandemic-induced material price increases and labor shortages. An escalation clause also has the potential to create cost efficiencies for owners by eliminating the need for extra contingencies in bids to account for escalating material prices.

Contractors should also consider the potential impact of the pandemic on mobilization costs when entering into new contracts for future work. While mobilization costs are typically included in construction contracts, the possibility of a project being shut down and restarted several times due to potential government mandated restrictions can cause mobilization costs to escalate.

Contractors should consider negotiating the right to request additional compensation if these types of shutdowns occur or including contract language expressly indicating that the mobilization price includes a certain number of shutdowns and, once that number is exceeded, a provision that the owner will compensate the contractor for additional shutdowns.

What should construction firms understand about the different roles of a surety bond underwriter and a surety bond producer?

Darrin J. Oelke, AFSB
Regional Underwriting Officer
Travelers Insurance

A surety bond is an agreement under which one party, the surety, guarantees to another party, the obligee, the performance of an obligation by a third party, the principal. A surety bond underwriter is typically employed by a surety company. In the construction context, the surety bond underwriter’s role is to objectively analyze a contractor’s ability to undertake—and complete—a particular project.

To do so, the underwriter will evaluate various aspects of the contractor’s business, including its financial base, overall business plan, as well as current and past project performance before determining the type of surety program that may be required. The authority to extend a surety program and/or approve specific bonds typically resides with the underwriter, subject to the financial strength of the surety that issues the bond.

A surety bond broker functions as an advocate for the contractor and facilitates the extension of a surety program by working with a surety underwriter. The broker collects information from the contractor and provides the information to the underwriter as needed or requested. The broker also evaluates the terms and conditions required by a particular surety to ensure that they are acceptable to the contractor. The broker utilizes their knowledge of the surety industry as a whole, in addition to relationships with specific surety companies, to recommend which surety company best fits a specific contractor’s needs.

The surety bond broker may also assist the contractor in teaming with construction orientated banks, CPA firms and law firms. The placement of a contractor’s surety program is a joint decision by the contractor and their surety bond broker.

Working together, the surety underwriter and surety bond broker can establish a tailored surety program to help put the contractor in a position to succeed.

Cliff Spickler, CWCA 
Construction and Surety Professional
INSURICA

Surety is a relationship business, a mostly symbiotic one where steps taken to enhance a contractor’s bond-ability results in a better risk to the surety. The differences between the roles of a surety producer and underwriter are oftentimes obvious and other times not.

Producers are granted an account-specific limit of authority (LOA) by underwriters, which enables them to approve standard bond requests, yet the ultimate decision-making authority lies solely with the underwriters. Outside of an expiring and renewable LOA, producers have no authority to issue bonds.

The underwriter is the ultimate decision maker. It is the producer’s responsibility to present the contractor in the best light to the most appropriate underwriter with the most appropriate surety. The producer is responsible for educating their contractors: sharing what the process will look like, here is what you look like to the surety and this is what you can expect. The producer is also an advocate for their contractors if and when unfortunate things happen to good people.

Lastly, producers help to set short and long term goals: Where you are now? Where do you plan to be? What will you do to get there?

When the producer is doing all of this, the underwriter can do their job better, which is to make credit decisions to support and grow their contractors’ businesses. Remembering these relationships are symbiotic in nature ensures the underwriter and producer can walk alongside their contractor to provide meaningful surety credit for years to come.

Donald T. Johnson 
Assistant Vice President - Surety
CNA Surety

The bond producer obtains bonds, while the bond underwriter writes bonds. Simple. Yet that explanation is both simplistic and incomplete. A construction firm’s complete understanding of the different roles of a bond underwriter and bond producer, and particularly the business goals behind those roles, can be of great benefit to the operations of the construction firm.

The surety underwriter’s role is to make an informed risk assessment based on information provided by the construction firm and producer. The bond underwriter can assist the construction firm in minimizing risks by suggesting an array of risk mitigation tools. The construction firm can use the bond underwriter as a devil’s advocate, stress testing information provided. Yet it should be recognized by the construction firm that the underwriter’s overriding considerations are the aversion to risk, avoiding bond losses and protecting the surety company’s bottom line.

The bond producer is an advisor to the construction firm and advocates on the firm’s behalf in the role of a conduit to the surety company. The producer assists a construction firm in assembling the proper information to be sent to the surety underwriter. Yet it should be recognized that the overriding consideration is the producer’s goal to get the bond written or surety line placed, as ultimately that is how the producer is compensated.

A construction firm can take advantage of these divergent interests and roles of the underwriter and producer by utilizing the underwriter’s technical expertise and risk mitigation techniques, while also optimizing the producer’s sales skills with the surety. With eyes wide open, the construction firm can then make informed decisions that ultimately can meet the business goals of the producer, underwriter, and most importantly, the construction firm itself.

How can having a qualified construction CPA help increase your bond line?

Michael Ceschini
Managing Member
Ceschini CPAs

The construction industry is truly unique in that bonding companies have a special, critical relationship with contractors. An experienced construction CPA firm can be vital, sometimes indispensable, to this relationship by understanding a construction company’s needs and effectively communicating them to the bonding company through proper financial reporting and documentation.

There are many ways in which an experienced construction CPA firm can help a contractor increase its bonding line, starting with timely financial statements that are in full conformity with current financial reporting requirements for contractors. This allows the contractor the opportunity to demonstrate to the surety how project earnings are impacting the balance sheet, working capital and equity.

Sureties typically make a variety of adjustments to a contractor’s financial statements in computing bonding limits. By having a close working relationship and ongoing communication throughout the year with a knowledgeable construction CPA firm can work to your advantage by helping to maintain liquidity and holding payables at year-end, converting underbillings to unbilled receivables whenever possible, or cleaning up the balance sheet by repaying lines of credit, just to name a few.

A contractor who develops a close working relationship with a knowledgeable and experienced firm is like having a non-equity partner advising the business year-round. Furthermore, working with a firm that is known to the surety community also shows the surety the contractor’s commitment to both its business and its relationship with the surety. These relationships may help expedite a surety bond decision and possibly increase your bonding capacity if the company’s financial strength indicates an increase.

How does a surety adjust a CPA-prepared financial statement in order to calculate a construction firm’s bond program?

Todd Feuerman
Director
Ellin & Tucker

Oftentimes, the life-blood of construction firms and contractors is their bonding capacity, which is based on information provided on the CPA’s financial statements. Bonding capacity is the maximum amount of surety credit a surety company will provide a contractor, typically determined by the largest single project the surety would be willing to issue and the maximum amount of contract backlog a contractor can hold.

A bonding company requires, at a minimum, a reviewed financial statement; however, the larger the operations, the greater potential for an audit requirement. Not only is the level of CPA financial reporting critical during the bonding process, the experience and reputation of the CPA in the construction arena are equally vital.

The biggest factor in determining how single and aggregate bonding limits are set is the financial data extracted from a CPA’s financial statement on the contractor. The two most important areas of focus during the credit underwriting are net working capital and equity. Generally speaking, bonding programs are calculated based on a multiple of anywhere from 10-20 times the “adjusted” new working capital and approximately 10 to 15 times the “adjusted” equity of a contractor. The most common adjustments made during underwriting relate to soft assets, unrecorded liabilities and other non-liquid balance sheet items.

The most critical factors that impact multiples used in the computation of a bonding program include quality/reliability of CPA firm’s financial statements, historical job performance, management experience and proven ability to complete jobs on time and within budget.

What advice do you have for contractors considering making a claim on a surety bond?

Shoshana Rothman
Attorney
Smith, Currie & Hancock LLP

Contractors and others considering making a claim on a surety bond should ensure they carefully read and understand all terms in the bond. Surety bonds often have specific language regarding who can make a claim, time requirements for a claim, and how and where to transmit the claim. Bonds either directly or implicitly identify the types of information to include with the claim. Failing to follow the strict requirements in the bond may be fatal to a claim. The bond will also specify what costs or claims the surety guarantees. For example, a traditional payment bond only secures payment for labor and materials by persons within the bond’s definition of “claimant.” Performance bonds guarantee the completion of the bonded work and have specific triggers, which must be satisfied.

Upon receipt of a claim, the surety will frequently request additional information from the claimant, such as payment applications, change orders, backcharges, and other project documents. Claimants should promptly gather and organize that information, and then timely submit it to the surety.
Another good rule of thumb is that “the squeaky wheel gets the grease,” and it benefits claimants to be proactive and offer sureties all supporting documents, organize a meeting between the surety and project personnel, offer to schedule a site visit for the surety to see the work firsthand, and to follow up regularly with the surety. Experienced construction counsel can help with presenting the best case to the surety, thereby mitigating the risk of non-recovery by the claimant.

What best practices should a construction company adhere to when navigating their contracts in the ongoing wake of the pandemic?

Michael A. Marra
Vice President
American Arbitration Association-International Centre for Dispute Resolution®

The pandemic of COVID-19 has created an unprecedented environment where it is more important than ever for companies to consider their dispute resolution options when drafting new contracts. The access to courts has been severely compromised, so companies would be wise to provide in their contracts for alternative dispute resolution (ADR), specifically arbitration, should the project go awry.

Prior to the closure of the court system due to the virus, the average time for a case to reach resolution in the U.S. District Court was 24.2 months, excluding appeals (microeconomics.com, March 2017). Undeniably, that measure has and will continue to increase with the inability of the courts to hear cases. In contrast, arbitrations can and did take place; the American Arbitration Association—where administered arbitrations take an average of 11.6 months and typically are final and binding—remained open throughout with hearings proceeding virtually (IBID).

Arbitration is a creature of contract, and careful consideration must be given to the creation of the clause. In addition to considering specifying locale, number of arbitrators, qualification of arbitrators, duration of arbitration proceedings, scope of discovery and other details of the arbitral process, now it is crucial to consider whether hearings must be in person or held virtually if necessary or more efficient.

What should a construction firm take into account when deciding whether to terminate a contractor for default?

Michael C. Zisa
Chair, Surety and Construction Related Insurance Defense
Peckar & Abramson, P.C.

The decision to terminate a contractor for default must not be taken lightly. A termination can impact the flow of the work at the project and result in a dispute with the terminated contractor and its surety. Therefore, before pulling the trigger on a termination for default, contractors must consider a number of issues.

First, the contractor may wish to evaluate whether termination is the only available option to address the issue or if other less drastic measures are available. For example, depending on the issues, conducting a meeting with the contractor and its surety may be enough to get the contractor back on track.

However, if a meeting or other measure does not work or is not a viable option, then the contractor must analyze the applicable contract to determine the necessary bases and procedure for a default termination. Most contracts require that notice and opportunity to cure the default be provided prior to termination. Failure to comply with the contract’s procedure can deprive the contractor of its right to recover damages and possibly entitle the wrongfully terminated contractor to damages. In addition to the contract, contractors are encouraged to evaluate applicable bonds. Many performance bonds contain specific conditions precedent that must be satisfied in order to trigger the surety’s liability under the bond. Once the contract and bond are reviewed, the contractor must evaluate whether a sufficient basis exists to support the termination and ensure that the necessary procedures are followed.

Finally, before making the decision to terminate, contractors must also consider how they will complete the terminated contractor’s work. Are there other qualified contractors available to complete the work? What will be the surety’s role? Are there long lead items? What measures can be taken to mitigate the impact?

In short, a careful evaluation of the applicable contracts and circumstances is necessary before exercising a termination for default.