Many owner-developers choose to forego requiring a Performance and Payment Bond from their contractors in the hope of shaving another 1%-2% from the project cost. However, current market conditions suggest that owners rethink that decision.
The current industry environment consists of busy contractors competing for a limited labor pool, and struggling to meet ambitious project schedules. Owners are hiring contractors who may be marginally qualified to do the work and utilizing subcontractors who may not be categorized as “A-team” players. Owners looking for the lowest fee are often hiring contractors who are ill-equipped to deliver a complicated project on time and on budget. As a result, significant cost overruns and expensive delays are being encountered with greater frequency.
Owners who elect to bond their next project are – for the cost of a bond premium – mitigating their risk in three important respects:
1. Prequalification of a Contractor:
While a sophisticated owner can, and should, do its own contractor pre-qualification, a bonding company regularly does this in a way that most owners cannot duplicate, due in part by their unfettered access to sensitive contractor financial records. By selecting a contractor with bonding capacity, an owner has a much better chance of making a safer choice.
2. Getting the Contractor’s Best Efforts:
While having a performance bond is no guarantee of avoiding problems, and does not automatically convert to a quick settlement payment in the event of a dispute, a bonding company will often apply pressure to get a contractor’s attention when an owner expresses concern or asserts a claim. This can motivate a contractor to make the bonded project a real priority rather than letting the schedule drift or a problem fester. And contractors on bonded work cannot afford to “walk away” from a problem.
3. Getting Paid for Cost Overruns:
An owner who hires a contractor who defaults often has little recourse, as the contractor may be overdrawn in billings and uncollectable. In contrast, a performance bond means that if the contractor defaults and becomes uncollectable the bonding company is on the hook to pay the excess completion or correction costs. And a payment bond ensures that subs and suppliers are paid, rather than forcing an owner to “pay twice” to avoid mechanic’s liens on the project.
Owners planning significant private projects may want to seriously consider requiring a Performance and Payment Bond to avoid unplanned costs and delays that are being frequently encountered in the current construction environment. A sizeable bond premium may be a worthwhile project expenditure that helps avoid much more significant unplanned costs later.
