Construction bond - Who is responsible?

Hello everybody,

I would like some enlightenment on construction bond and its ramifications. I tried googling it but it is not very clear who is responsible for what.

I am currently building a business on leased premises and have hired a contractor for the buildout. The landlord wants a construction bond from the contractor. The contractor tells me I have to pay for the bond. Is that correct?

Googling this does not help me a whole lot in understanding this: It seems to say that the contractor has a duty to me to complete construction and so they need a bond to guarantee that. I am the obligee and they are the principal, right? So why would I pay for their bond? Will this amount be in addition to the construction bid that they submitted to me at the start of the project?

Do you think I should consult a surety bond attorney for this issue?

Thanks for any insights.

For city projects, the contractor always supplies any bonds. Small contractors sometimes don’t have the capital for bonds, but most cities don’t want to deal with the cost and the added work. That said, the need for any bonds is plain in the bid documents before contractors submit their proposals. Contractors just add the cost of the bond into their estimates.

If you’re requesting a bond after you’ve accepted an estimate from the contractor, you’re changing the scope of the project. On a city project, such an addition would require a change order. We’d end up paying the cost of the bond plus 15% for administration and overhead.

So the question is, was there already a contract or agreed price, so that adding the bond is a change, or is the contractor undercapitalized enough that they can’t afford the cost at the beginning of any project? The project always bears the cost one way or another.

Yllaria,

The agreed upon contract did not have any bond provision. The bond is being required by the landlord outside of the scope of the agreement between me and my contractor. It is not my requirement. So I guess you are right that this is an additional cost that I have to bear due to the landlord’s requirement. Is that correct?

I don’t understand what is the nature of this bond. Is it like a security deposit that is refundable to me after the completion of the project if no claims are made? Or is it just an additional project cost that I have to eat as part of doing business?

Thanks for the help.

The bond is basically to insure against the possibility of the contractor leaving the project unfinished, so that the landlord is not left with an unsightly or unsafe half-completed shell on the property. The bank or other financial institution issuing the bond will charge a fee, which becomes part of the project cost.

Disclaimer: I am not your lawyer, and this is just anonymous internet chat.

Thanks for the answer.

I guess my issue is that the contractor tells me that they never had to do this with any other previous project of theirs (they have constructed many such projects before). The cost of the bond is over $4000 which seems like a large amount that I have to pay for something that is not needed from my side because I am the tenant and the contractor is working for me. Afterall, I will be the one on the hook if construction cannot be completed because I still owe rent on the space.

Is this something I should fight back against the landlord to waive? Should I hire an attorney for this matter? If that helps, what kind of attorney?

Look in your lease. Does your lease require you to post a bond for any tenant improvements? If the lease doesn’t require it, then tell your landlord to pound sand.
ETA: Your landlord is less concerned about a partially finished project and more concerned about your contractor and subcontractor not being paid and them filing a lien against his property.

One unanswered question: This bond (or any portion thereof) is not refundable to me after the project even if there are no claims filed against the principal? Just making sure I understand. Thanks.

That’s my understanding. You’re basically paying a service fee for the bank or insurance company to make the bond available during the period in question, and it’s non-refundable. Think of it like car insurance; you don’t get your premiums back even if you don’t make a claim.

Normally a contractor knows of the bond requirement prior to placement of the bid. If a bond is required they would they would place the cost of the bond in the bid, as it is a cost to the contractor. All contractors have a chart from their bonding agents with which they can calculate the cost of the bond down to the penny.

Therefore you will pay for the bond no matter what.

Also, there are no refunds on a bond. You are buying insurance under another name.

There may be another option. Bonds have both a fee and a payout amount, which is usually 100% of the agreed construction cost. Our city will allow contractors, in lieu of their bonds (most projects have at least two - both for 100% of the contract costs) to deposit the complete payout amount(s) into an escrow account at a bank. There are fees involved, of course, but the money also earns interest while it’s in the account.

When the Notice of Completion is issued, the bank releases the money in the account to the Contractor. If the Contractor defaults on the project, the bank releases the money, or a prorated portion of it, to the City to hire another Contractor to complete the project.

If you have the capital, and if the fees are lower than the bond fees, you could offer to set up such an account. Your landlord may be willing to settle for 50% of the costs being put into escrow.