Many contractors, no matter how skilled, have faced the threat of a claim against their surety bond from an unhappy client or subcontractor.
Often, an issue that seems small can become the foundation for a claim, even if the issue is beyond the control of the contractor that executed the project. It’s always a good idea for contractors to work with a lawyer who specializes in construction, so they can consult them for each project. There are some common reasons for construction bond claims, which can be avoided or minimized with some careful planning and oversight.
Why Should Contractors Avoid Surety Bonds Claims?
Construction contractors are always advised to do their best to avoid bond claims against them. The most obvious reason is financial. If the claim is successful, the contractor can be ordered to pay up to the full amount listed in the bond plus legal expenses. The surety pays the claim initially, but the construction company must repay the surety. It’s important to be familiar with how surety bonds work and remember that they protect clients and federal, state and local entities, not the construction company..
A claim can severely hurt a contractor’s reputation, especially in certain niche industries where people rely on word-of-mouth recommendations from their peers. Bonding companies also will be less willing to provide bonds in the future for a contractor that has a history of bond claims.
1. Reach a Settlement. Even if a contractor is guilty of violating the terms of the bond or the contract, it should still do its best to de-escalate the problem before it becomes a claim. Usually, a settlement can be carried out between the disputing parties, which will be much less troublesome than a claim even if the sum is approximately the same.
Just as with any contract, it’s important that the text of the settlement agreement is clear and will not give rise to further disputes because of ambiguity. Even though oral agreements are permissible, they are harder to prove, so a written one is always preferred. When they’re executed properly, settlement agreements can save time and aggravation, and keep a business in good standing.
2. Draft Contracts With Care. It might sound like common sense, but often it’s the contract itself that is giving rise to disputes. In fact, studies show that as many as 60 percent of claims are caused by poorly written contracts. Depending on how they are written, some contracts overly favor one side and shift all the risks to the other. A good contract will always distribute the responsibility equally in order to minimize the chance of disputes. Most importantly, the contract should be as clear and specific as possible to avoid mix-ups over vague language.
No matter how well-written the contract, disputes are possible and should be accounted for in the language used. A good contract will always have an alternative dispute resolution process outlining how disputes can be resolved out of court.
3. Document Everything. No contract can offer zero risk from claims. Regardless of whether the contractor feels it is right or in the wrong, documentation can help the case tremendously during a dispute. Every step of the dispute should be meticulously documented, along with the steps taken to resolve it, so that when it goes to court, it can be used to defend one’s case. Furthermore, if the surety bond provider decides to join the side of the contractor and battle the claim, this type of documentation can prove essential.
4. Communicate Early and Often. Another common reason for claims is a lack of proper communication between the parties involved, the end result being a mismatch in expectations. Of course, this can be minimized by using proper and detailed language in the contract, but that’s only the first step. Communication should be ongoing through all stages of the execution of the project to avoid misunderstandings. Modern methods of construction site surveillance, such as the use of drones, make it easier than ever before for client and contractor to exchange real-time information on the progress of the project.
5. Choose the Right Team. Among the cited reasons for construction bond claims are conflicts between the general contractor and the subcontractors, failures to cooperate and delays in supplied materials. Each of these reasons depends on the choice of a team that executes the projects. Contractors should work with laborers and suppliers whom they trust, and vice versa, to reduce the chances of mishaps. Relationships between stakeholders should be built on trust and problems should be dealt with directly and in a timely manner. Contractors are always advised to pay suppliers and laborers on time in order to avoid claims against their payment bonds.
6. Bid Estimates. It often happens that the project cannot be executed at the price the contractor submitted in his bid. This can become a basis for a claim against the contractor’s bid bond or performance bond. Because contractors often have a very short period of time to submit a bid, a precise cost prediction is not always possible. Here, documentation is once again of great importance because courts often find contractors not at fault when they review their documentation and see how the assumptions leading to the bid were made. A constructability and biddability review of the engineering and design teams also must be performed, so that the contractor doesn’t unknowingly submit a contract package that lacks in biddability and constructability.
A thorough understanding of the language used in the surety bonds agreement, and its meticulous observation, are always in the contractor’s best interest and will help avoid contract bond claims.