Every construction project, whether large or small, comes with risks. Contractors, subcontractors and materialmen worry whether payment will be made; conversely, project owners, developers and general contractors worry that subs and suppliers will properly perform. Fortunately, there are several statutory and common law rights which help alleviate some of these stresses including mechanics and materialmen’s liens, payment bonds and performance bonds.
Payment bonds (sometimes also called surety bonds or construction bonds) and performance bonds are essentially insurance contracts between three parties:
- the Obligee (the project owner which is often a governmental agency)
- the Principal (the purchaser of the policy which is often the general contractor
- the Surety (the underwriter which is usually an insurance company)
Payment bonds offer assurances to those on lower tiers (such as subcontractors and suppliers) that they will be paid for the work or the materials which they supply; performance bonds offer assurance to those on higher tiers (such as owners or prime contractors) that the work will be completed. On private projects, payment bonds and performance bonds are optional; however, on State of Georgia public works projects and federal public works projects, payment bonds and performance bonds may be mandatory.
There are new, additional types of insurance products which are increasingly becoming available. There are several different names by which these new products are known, but two of the more common names are ConstructAssure and Subguard.
These insurance products are sold by the surety to general contracts (so there are only two parties involved), and it functions as subcontractor default insurance which offers protection to the general contractor against unbonded first tier subcontractors. In other words, it can be seen as an indemnification policy wherein the surety agrees to indemnify the general contractor in the event that a subcontractor fails to perform.
As with all insurance policies, there are advantages and disadvantages to their use. Often cited examples of the advantages include the following:
- general contractors appreciate that their indirect losses (office, overhead, mobilization, etc.) as well as their direct losses can be included in the claim;
- the policy may stipulate that indirect costs are a percentage of the direct costs (for example 10% or 20%); thus, the claimant does not have to prove their indirect losses;
- claims are paid quickly which helps the contractor as well as the project;
- the contractors pre-qualify the subcontractors;
- these policies tend to be much less expensive because they have a high deductible (frequently ranging from $250,000 to $1,000,000 whereas there are no deductibles with payment bonds or surety bonding; and
- a policy may be issued for a specific project or it may cover all of a general contractor’s project for a year (or renewal term).
Does These Subcontractor Indemnification Policies Replace Payment Bonds? Most Georgia state and municipal public works projects and most federal public works projects require payment bonds and have set minimum standards for the bonds. Subguard and similar policies do not meet these minimum requirements, thus, public works projects still require payment bonds. This does not, however, preclude a general contractor from having a Subguard policy in place on a public project.
If you have any questions about bonding on private construction projects in Georgia or state or federal projects in Georgia, please feel free to contact the construction bond attorneys at the Cobb Law Group via email or by calling toll free 1-866-960-9539