Thought you knew it all about surety bonds?

Whenever a community is working on a project, I often wonder whether they will need a Surety Bond.  I have heard they can be expensive and can be complicated to enforce.  At other times, I have heard that they are a must!  I was lucky that Alex Barthet of The Lien Zone was available to help us learn a little bit more about surety bonds.

Alex is a partner at Miami Construction Lawyers, which, as its name implies, specializes in construction law.  Alex has been an attorney for almost 20 years and has served as the Chairman of the Miami-Dade Council, Associated Builders and Contractors Florida East Coast Chapter (2013) and Chairman of the Education Committee, Associated Builders and Contractors Florida East Coast Chapter (2013).  He hosts his own podcast, Lien Zone, and is a mechanical engineer by education.  He is a leading expert in the field and I was very fortunate that he took time out of his busy schedule to sit with me.

 

It is important to understand the difference between a surety bond and insurance.  With insurance, you pay a premium and in return they cover a claimable event within the parameters of the policy.  The insurance company does not expect you to pay them back for the cost of the claim.  In a surety bond, the surety will expect to collect the money they pay out in a claim.  This is because a surety bond is a contract between three (3) parties, where one party is responsible to the second party for the performance of the third party. 

 

Surety bonds provide a sense of security and can provide peace of mind.  According to Alex this is because the surety bond has performed its due diligence on the contractor.  This includes reviewing the contractor’s financial stability, years in business, and past performance.  A surety also investigates the contractor’s pending and past lawsuits.  As a result, not all contractors are bondable.  A contractor that is bonded should be able to provide a letter of bondability that provides the limits for which a contractor is bonded.  This is important as you do not want to hire a contractor with a $1 Million Bond for a $10 Million project.

 

There are two (2) types of bonds commonly used by Associations: a performance bond and a payment bond.  Lets explore a payment bond first.  According to the Business Dictionary a payment bond is a deposit or guaranty that is submitted by a contractor as a surety that all sums to subcontractors, suppliers, and other creditors will be paid on time.  A payment bond also keeps a property free and clear of any liens.  This is especially important when an association hires a contractor, because it allows owners to sell their units free of any construction liens for a project being performed in the community. 

 

The performance bond protects the owner from any default or failure of the contractor to complete the terms of a construction agreement.   A performance bond also ensures that the contractor completes the project, as well as all of the other terms stipulated in the contract.

 

Surety bonds can serve as an assurance to owners in your association, that as a Board member, you have done the best you can in hiring a contractor that will be able to perform the work under the agreed upon price and within a specified time frame.  The surety will step in and finish a project, when a contractor is not able to finish or comply with some terms of a construction agreement.  Of course this comes at a cost; and depending on the total cost of your project, a surety bond can be expensive.  The cost for a bond, according to Alex, ranges from .75% of the contract price (on the low end) to 2.5-3% of the contract price (on the higher end).  It is recommended that as an Association you ask for a copy of the actual invoice for the bond because contractors use the bond as a profit center. 

Alex advises that the terms and conditions of the bond can also be negotiated.  It is important that the Association have their attorney review the bond form in addition to the construction agreement to ensure that they are better protected.  Alex recommends that the bond should not include a provision that it go into effect when a contractor is terminated.  It is best that the Association be allowed to trigger the bond when a default is issued to the contractor.  He also recommends that the bond include a time frame under which the surety has to respond to a claim.

In addition to the protection a bond offers during the construction process, it also offers protection once the project is complete and is usually good for the term of the warranty issued by the contractor.  To learn more about surety bonds, please listen to this week’s podcast of Community Association Matters.

Alex also has his own podcast called the Lien Zone.  You can click here to listen in to his podcast.  Don’t forget to subscribe to the podcast so that you don’t miss future episodes!  For more information on how Alex Barthet, Esq. can help you feel free to reach him at [phone] or email him [e-mail].