When it comes to navigating Surety Performance Bond claims, understanding the roles and requirements of the involved parties: the Obligee (project owner or general contractor) and the Principal (general contractor or subcontractor) is critical. Knowing what is necessary for both parties in the claims process streamlines the claim and, in many cases, results in expedited resolution.
In this post, we
- Discuss each party’s roles and responsibilities when performance bond claims arise
- Offer perspective on what each party should focus on in fulfilling the requirements of their role
- Provide guidance on what each party should avoid
- Explore the keys to ensuring claim resolution
Understanding Surety Performance Bonds
When encountering a potential claim, both parties should review the bond in detail and understand the requirements and responsibilities of each, should the claim be initiated. Bonds can vary significantly, and each bond type will have different requirements of the parties. The information included in this article is based on a standard AIA (American Institute of Architects) 312 Performance Bond; it is important that all parties understand the nuances and specifics of the bond in question.
Obligee’s Responsibilities: Ensuring Project & Bond Compliance
What’s Needed: Critical Documentation
For Obligees, thorough documentation that details the project specifics is key. The timely transfer of this information to the Surety is integral to the claim process.
The following documentation is typically required when making a claim regarding the Principal’s performance:
- Performance bonds: evidence of the bond’s existence and its terms.
- Contracts, agreements and changes: these detail the project scope, timelines and payment terms.
- Records of performance issues: written documentation of instances where the Principal failed to comply with contract terms.
- Detailed claim description: Issues surrounding the claim, history of the project and requests for action from the Surety.
- Project financial status: Progress certificates, approved progress draws and relevant payment information to date.
- Project reports: Any known deficiencies or reports outlining project completion if available.
What’s Not Needed?
- Micromanagement: While obligee oversight is necessary, over-involvement can instigate new issues, reduce the contractor’s ability to complete the contract, and in drastic scenarios, invalidate the ability to hold a valid claim upon the bond.
- New contract requirements: At the time of the claim, the project is limited to the original contract and approved change orders. It is not the time for additional, unapproved work to be incorporated.
- Documentation related to other projects: Documents that don’t pertain directly to the bonded work or contract directly associated with the claim, including performance history on other projects is not required.
Principal’s Responsibilities: Upholding Contract Terms
What’s Needed: Adhering to Contractual Obligations
For the Principal, the focus should be on maintaining a high level of communication. i.e., responding to questions, concerns, and formal notices thoroughly and quickly. By continuing to complete the work to the contractual standard safely and efficiently, the Principal can avoid both additional default notices and further issues. Key actions for responding to a claim notice include:
- Maintaining project standards: Continue to ensure the work meets the quality and timelines stipulated in the contract.
- Communicating clearly: Maintain a high level of responsiveness and communication with the Obligee, Surety and other associated parties.
- Rectifying defaults: Respond to default notices in writing prior to the expiration of any noted timelines in the contract, and work toward creating a plan to rectify deficiencies or default items.
- Maintaining project finances: Continue to ensure that payments to subcontractors and suppliers are up-to-date, and work to remove any liens placed on the project.
- Providing regular updates: Keep the Obligee and Surety informed about project progress.
- Disclosing challenges: Inform the Obligee and Surety of any issues that might affect project completion, and develop a plan to mitigate timelines, costs and damages.
What’s Not Needed?
- Over-promising: Making unrealistic commitments or commitments you don’t intend to fulfill, typically including schedule or workforce commitments, can be damaging.
- Withholding Information: Not sharing vital project information with the Obligee and Surety can complicate the claims process and result in additional damages.
- Withdrawing from site: In many cases, withdrawing from site can cause significantly more harm than good. It is best to remain on site and continue to communicate and resolve challenges to complete the work.
- Removing construction materials from site: Material possession varies from state-to-state, and project- to-project. Many states have laws in place that consider materials on site to be the property of the project. It is a best practice that a Principal, subcontractor or supplier never remove materials from a construction site.
Essentials for Efficient Claim Resolution
Every claim is unique and must be properly evaluated to ensure that appropriate remedial techniques are implemented. Through diligent claims management and communication, the project maintains the best likelihood of retaining, as closely as possible, its original budget, schedule and quality. It is the responsibility of all parties to work collaboratively to overcome the claim scenario and complete the project. Key considerations are:
- Professional cooperation: Direct and honest dialogue between all parties can lead to faster resolution.
- Documented evidence: Documented evidence of true contract breaches or compliance issues can contribute to a faster claims response.
- Delays in notification: Waiting too long to notify the Surety can complicate and prolong the resolution process.
- Litigation as a first resort: Jumping to legal action can escalate the situation unnecessarily. Alternative dispute resolution methods should be considered first.
- Forcing a completion method: While Obligees often will immediately mandate a specified completion method, it is routine that the Surety holds the decision on how a valid claim will be remediated. Parties should trust Surety professionals to review the specifics of completion solutions and select the most suitable completion method to satisfy the project.
Having realistic expectations among all parties is fundamental. For example, often in claims, project schedules are under stress. If a schedule is already strained, it is not reasonable or even possible to overcorrect the work plan to a point at which the previous schedule can be maintained. The existing schedule of a project at the time of the claim is often the earliest a project can feasibly be completed. Shared recognition that if the Principal is removed from completing the project, the schedule will be unavoidably extended further is often a powerful motivator to collaborate.
Navigating Surety Performance Bond claims requires a balanced approach from both Obligees and Principals. While thorough documentation, proactive monitoring and adherence to contractual obligations are initial tools available to the Obligee, avoiding over-involvement, premature default and premature litigation are equally important.
When parties focus on collaboration, clear communication and problem solving, the process will be more efficient and result in faster and more amicable resolutions for all parties.
Ultimately, all parties must make informed decisions when encountering a potential claim. It is the sole decision of each party to retain independent legal counsel in event of a claim. Nothing in this article should be considered legal advice.