Another Risk Management Tool for Private Owners in a Volatile Market | Stoel Rives – Ahead of schedule
Given, well, the state of everything, private owners should seriously consider requiring the contractor to obtain a performance bond (a third-party surety guaranteeing the contractor’s performance under the contract of the contractor with the owner), when assessing the risks now inherent in construction projects.
Traditionally, private owners did not consider bonds (either payment or general contractor performance bonds) because of the added cost. Naturally, all Owners expect that all contractors and their subcontractors, suppliers and vendors will perform the obligations of the terms of the Contract, and Owners will pay for such performance. The current volatile market, much like the Great Recession, should cause owners to question this earlier confidence.
Current risks, for large or medium projects, may well bear the cost of a performance bond to provide the owner with an additional tool for assurance that the project will be completed for the contract price, and closer on schedule. than if there was no performance bond. Given market volatility resulting from understaffed contractors and subcontractors due to labor shortages, unskilled labor, supply chain failures, ‘unchecked inflation, analysis of the value of alternative products if available, threats from the contractor to walk away if the owner does not accept questionable change orders, and excessive escalation of cost claims, including none are covered by traditional project insurance, owners must assess how they will manage these risks if the contractor fails to perform despite requests to remedy a failure to perform.
Although an owner should realistically consider how to negotiate a reasonable and financially realistic agreement so that the risk of a completed project is objectively assessed or deposited if financially necessary until there is greater stability, the owner may be able to pay the cost for the contractor to obtain a performance bond to insure against potential failure to perform by the contractor, which may otherwise be ultimately at the owner’s financial risk .
Usually, where there is no guarantee of performance, the owner’s only options in the event of default by a potential or actual contractor are (a) to demand performance, but often, under the duress of the project , negotiate a resolution and possibly pay the contractor more to continue performing (under protest, in the hope that funds can be recovered later), or (b) go through the default and termination process with the contractor (which further delays the project and often without a good substitute), which usually results in litigation and costly arbitration or litigation, and a stalled project.
If the Contractor, however, has its contract covered by a performance bond for the full and faithful performance of the Owner’s contract, on the basis of the Owner’s viable default claim, the Owner will be given an opportunity to give notice the contractor’s anticipated default on the surety. Notice to surety on bond (a) often induces the contractor to properly complete the project under the threat that the surety will step in to perform and that the surety will then seek compensation from the contractor, which the surety has already guaranteed by the assets of the contractor, or (b) among other surety options, require the surety to engage with a substitute contractor to complete the project for the balance of the contract value and within the duration obligations of the contract, subject to the contractual ramifications of the delay. Therefore, rather than the actual substantial risk ends up with the owner in the event of contractor default, where there are often difficult and time-consuming litigation or arbitration processes for a successful legal “victory” by the owner over a such a claim, the owner with a performance bond will have an additional tool to use quickly to achieve leverage and better project management to completion at or near contract time and value of the contract.
It is important to note, however, that the execution of the bond is not automatic, as it is the responsibility of the contractor to assess the claims made by the owner. Therefore, in a contentious factual dispute, the surety may assume all of the contractor’s defenses and refuse to honor the surety covenant, which still results in arbitration or litigation on the owner’s claim, but with the contractor. and the surety at the table. .
Owners should realistically assess the potential uninsured risks of a contractor’s inability to properly perform the contracted work. This assessment, in this volatile market, must include the cost-benefit analysis of hiring a contractor who can provide the owner with a performance bond to better ensure that the project will be performed as agreed and represented by the owner. ‘contractor.
Originally published as an editorial by the Oregon Daily Journal of Commerce on March 16, 2022.