Sunday, May 12, 2013

Are You Releasing Payment and Performance Bonds Too Early?

Bonding companies regularly send "status inquiry" forms to public agencies about the status of public works construction projects for which they have issued payment and performance bonds.  Sureties are trying to monitor and keep track of their potential liabilities.

Uncompleted projects:  Status inquiry forms typically ask questions such as the following for projects that have not yet been completed:
  • Approximate percentage of the project that has been completed
  • Approximate dollar amount of the contract that has been paid
  • Anticipated completion date
  • Listing of any unpaid labor or material bills the public agency knows about
  • Whether the agency is satisfied with the work performed to date
Completed projects:  If the project has been completed, the status inquiry form will typically ask for the completion date and the final contract amount paid to the contractor.

Read the fine print:  For a project that has been completed, some status inquiry forms will also have a statement (that goes along with the public agency's signature on the form) that may read something like the following:
The bonding company is hereby released from all past, present and future liability under this bond.  Please confirm this by signing below and returning this form with the original bond.
Problems with the fine print:  There are two problems with the fine print language noted above:
  • Warranty work:  Even though the work on the project may be complete, most public works construction contracts include language in which the contractor warrants or guaranties for the work for a year after completion.  If a public agency signs the status inquiry form releasing the payment and performance bond before the warranty period is over, and if the contractor fails to return to correct work during the warranty period, the public agency will not have any protection that would otherwise be afforded by the bond to ensure that the warranty work is completed.  When a surety issues a bond, they agree to all of the provisions of the contract, which includes the warranty period, so public agencies should not sign an inquiry status form releasing the bond before the end of the warranty period.
  • Keep the original bond:  The original payment and performance bond is a matter of public record and should be retained by the public agency, even after the work has been completed and the warranty period has expired.  Auditors frequently examine project files to ensure the public agency has obtained the required payment and performance bond.  If an agency has returned the original bond to the surety, they may be at risk of an audit finding.  Furthermore, there is no reason why the surety must have the original bond back.  Under the language of the bond, the bond becomes unenforceable when all of the obligations of the contractor have been met (i.e., the project has been successfully completed through the warranty period and all subcontractors, suppliers, and workers have been paid).
Practical tips:  The following steps can help ensure you are not releasing the bond early and giving up your rights under the bond:
  • Read the fine print:  Read the language of the status inquiry form carefully before filling it out and signing it.
  • Cross out the fine print:  When completing a status inquiry form from a surety, cross out and initial language that would release the bond prior to the expiration of the warranty period or that requires the original bond to be returned to the surety.  
  • Train your staff:  Make sure that agency staff who complete these forms are properly trained and aware of the issues.
  • Signature authority:  Be deliberate about who in your agency is authorized to sign status inquiry forms.  This person should read the language of the form before signing to ensure they are not giving up the agency's rights under the bond.
  • Consult with your attorney:  If you have any questions about the impact of signing a status inquiry form, or the language on a form, be sure to consult with your agency's attorney for advice.
Mike Purdy's Public Contracting Blog 
© 2013 by Michael E. Purdy Associates, LLC

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