In the eyes of a construction project owner, a payment and performance bond is like that warm fuzzy security blanket that eliminates all of your problems. Linking is one of those construction problems that I never fully understood. And I guess I still haven’t, but my knowledge probably quadrupled when I tried to get one for myself.
We’ve all heard of the requirement that contractors be bonded and insured, and this is especially the case when public entities are using a low-bid method to select contractors. But really, what are they?
Bonds provide financial security and construction assurance by assuring homeowners that contractors will perform the work and pay subcontractors, workers, and material suppliers. Basically, it is a risk transfer mechanism in which the surety company assures the project owner that the contractor will perform a contract according to the contract documents. If the contractor defaults or goes bankrupt, the surety company comes in and finishes the job on their dime.
The bonds are actually much older than you thought. I read an article about the earliest known link that was etched into a clay tablet from the Mesopotamian region around 2750 BC. According to the contract, a farmer recruited into the king’s service could not tend his fields. The farmer hired another farmer to take care of them on the condition that they split the profits equally. A local merchant acted as guarantor and secured the fulfillment of the second farmer – a brave man.
However, even in 2750 BC. C., Mesopotamia, payment and fulfillment bonds were harder to find than an explosive money clip, and without a code name like 007, it’s still hard to get one. This week he was chasing (without Alpha Romeo) a payment and performance bond while preparing an offer for a public redress project. After days of arguing and filling out financial forms, I was told about two hours before the time of the offer that I would have to put 30% of the value of the contract as collateral to get a surety. Thanks for the news.
Just as a municipality doesn’t want to take a chance on an untested contractor, a surety bond is just as cautious. This leads me to wonder what use they are anyway; They won’t bind you unless the risk of default is close to zero to begin with. The owner could easily write Performance Bonds joint checks or contract directly with the sub (which, by the way, is also tied) and hire the general contractor as a consulting construction manager.
However, in private projects, this is how most of the work is done. In an effort to avoid duplicating security (and wasting money), subscribers are bound and the overall contract does not bind or act as a consulting manager. This is the most practical and cost-effective way to do it, but when taxpayers’ money is at stake, I suppose logic, practicality, and undoubtedly cost-effectiveness kicks in on a BMW Z8 and shredded with a helicopter.