Getting adequate performance-bonding capacity to work on bigger projects can be great for your business, but once you have the capacity you must be careful what bond forms you agree to. The language of the performance bond will determine how and when a general contractor makes a claim, which could potentially put you out of business. A recent white paper from the Alexandria, Va.-based American Subcontractors Association (ASA), “Performance Bond Requirements,” outlines how subcontractors can negotiate performance-bond forms.
While not one of the top problems you may face, there are serious risks that bond forms can shift to your company. “Part of the reason that checking the performance-bond requirements is important is exactly because the recourse is generally spelled out in the performance bond itself,” says David Mendes, senior director of communications and education for ASA. “If it's not a performance bond that gives the subcontractor fair terms, then there's no recourse for the subcontractor except through other parts of the contract.”
Therefore, your best protection against the shift of risk is prevention. “Obviously, there's legal recourse, but that's expensive,” Mendes says. “There is a claims procedure that can be followed. I believe some performance bonds do have requirements to make an argument to the surety regarding wrongful termination or a breach of the performance bond contract, but none of that matters if the terms of the performance bond itself are not equitable.”
There are many models of performance-bond requirements available to subcontractors. The ASA, Associated General Contractors of America (AGC), and Associated Specialty Contractors (ASC) offer examples and case studies on the Web at http://www.constructionguidelines.org. But before using any model, however, you should make sure the language is even-handed, equitable, and sponsored by a reputable organization. “There are some bond forms that are falsely represented as being published by industry groups,” says Mendes.
Ultimately, however, you must determine your own level of risk. “There may be some language that you would never want to find,” Mendes says. “But if you're working with a customer with which you have had a very long relationship and you trust it, you may have a lower threshold than working with a contractor that you do not know, that you have not worked with before, and maybe it's from out of state. In that situation you would probably want to have a pretty high threshold for what you would accept in that performance-bond language.”
Avoid these terms when agreeing to performance-bond requirements:
- GC/CM may simply “declare” the subcontractor to be in default.
- GC/CM “reserves the right to make claims on the bond without terminating the subcontractor's contract.”
- Performance-bond terms to be specified “acceptable to” GC/CM.
- Bond form that appears to be endorsed by industry organizations but is not officially endorsed.