Understanding the Construction Bond Claims Process in North Carolina (guest post)

craneAs an architect, engineer, or other design professional, you may be called upon to assist the owner when a bond claim has been made, and a new contractor is being brought in to take over the project.    Therefore, it is important to understand how the surety handles bond claims and the bonding process, in general. 

With that in mind, today we have a guest post on the ins and outs of bond claims in North Carolina from a surety bond expert– founder and president of Lance Surety Bond Associates, Vic Lance. Vic is a graduate of Villanova University with a degree in Business Administration and holds an MBA from the University of Michigan’s Ross School of Business.  

Take it away, Vic…! 

As construction specialists in North Carolina are well aware, contract bonds are an indispensable requirement for bidding on public and private projects all across the U.S.   Unfortunately, even the most diligent contractors can get into trouble with construction bond claims. Claims are typically filed when project owners are not satisfied with the quality of the executed work, or if the contractor defaults or breaches contractual obligations.

While avoiding surety bond claims is the best option, sometimes claims are inevitable. Let’s take a look at the basics about surety bond claims and the specificities that North Carolina construction professionals should keep in mind.

The way contract bonds work

Construction contract bonds, including bid bonds, payment bonds and performance bonds, are often a requirement for bidding on public and private projects. Similarly to other surety bonds, they are a three-party agreement between the contractor who needs the bonding, the entity requiring the bond (usually the project owner) and the surety that underwrites the bond. Contractors cover a percentage of the bond amount, which is their actual bond cost, in order to get the backing.

For example, Federal construction projects above $100,000, as well as the majority state and local ones, require contractors to obtain both payment bonds and performance bonds. As for private projects such as commercial and residential buildings, project owners also prefer to include the bond requirement for bidders.

Payment bonds serve an important function in safeguarding subcontractors and suppliers. They guarantee that the main contractor will make all due payments on labor and materials. Performance bonds, on the other hand, directly protect project owners by allowing them to use the safety net of the bonds to hire another contractor to complete the work on time and with good quality.

signingThe basics about surety bond claims

There are different situations that can trigger a bond claim, but the most common ones include (1) defaults, (2) breaches of contractual agreements, and (3) non-payment to subcontractors or suppliers. Naturally, disputes can also occur that might not be directly linked to the actions of the contractor.

For North Carolina construction professionals, the most important thing to remember is that your surety is your best partner in such situations. It can provide legal and logistical help at all stages of the claim process. It’s up to the surety to carefully consider all facts about the case and to assess whether it stands a solid ground.

The typical resolution is to seek a settlement between the claimant and the contractor. Often this is the least problematic way to tackle the case, and sureties help their bonded clients in going through this process. As for the completion of the work, in the case of a performance bond claim, the surety either selects a contractor to finalize the project, or the project owner organizes a tender to choose a new contractor.  [Editor’s note: This is often also the time when the surety requests architect/engineer assistance in evaluating the project status and bringing a new contractor up to speed.]  For any compensation that the surety has given to affected parties, the contractor is fully responsible to reimburse it.

How construction bond claims are handled in North Carolina

While bond claims are generally handled in similar ways across the U.S., there are some specificities that North Carolina contractors should keep in mind. The legal basis for claims in the state are the Federal Miller Act, as well as the North Carolina Model Payment and Performance Bond Act. They set the rules for handling payment and performance bonds on public projects, but are not applicable to private ones.

These acts set the timeframe and notices requirements for payment bonds on public projects, but not for performance bonds on such projects. That’s why handling performance bond claims on both public and private projects is done via the language of the bond, the contract in question and the general legislation.

It’s important to note that on state projects, the bond protection covers only prime contractors, and the rules do not apply to subcontractors. The requirement for posting bonds in North Carolina public projects is for those projects above $300,000. As for payment claims, the North Carolina Act sets a 120-day notice requirement for subcontractors and suppliers to assert a claim against a contractor. Further details about the specifics can be found in the Surety’s Defenses to Construction Contract Termination document (pdf).

While surety bond claims are unpleasant for all parties involved, they are sometimes a fact in the construction industry. However, knowing the legal background is important for contractors, so that such cases can be minimized and solved in the best possible way.

What is your experience with construction bond claims? Please share your insights in the comments below.

Changes to your Scope of Services on the Construction Project (law note)

change!Our office is in the middle of a large renovation.  It’s been several months of drilling, sawing, painting, carpeting– you name it.  I’m proud to say that we have had not one change to the scope of work during that time.  <insert maniacal laughter here>.  Okay, that’s simply not true.  Change–like death, taxes, and bodily functions–happens.

In the same way that incoming wave will soon destroy that sand-written “change” sign in the picture that accompanies this post, change will happen in all parts of a construction project.

As the architect or engineer of record, you undoubtedly have a thoughtful, well-written contract or proposal.  Ideally, your contract states exactly what is, and is not, included.  But inevitably, something will slip through the cracks.  A likely scenario: the owner asks for “just a small change over here,” “one more quick site visit” over there, and hey, what’s a few extra months of contract administration among friends, right?

Whenever you experience such “scope creep”, document it.  Ask how compensation will be handled up front.  Even a quick email to the owner, stating that you’d be happy to make that extra site visit and will invoice per the contract, will make the owner aware that you expect compensation.   Have the discussion before the work is done.  When they are likely to say “great- how soon can you do it?”.  Or, if they don’t expect to pay you for your extra services, they’ll tell you that.  Either way, you’ll know what the expectations are for payment.  And, should you not get the payment later on, you have a nice piece of written evidence to show a judge or jury.

Your turn.  Have you experienced “scope creep” on a project?  How did you handle it?  Comment below, or drop me a line.  New readers: Check out the white paper on 7 Critical Mistakes that Design Professionals Make, available for free download on the right hand side of the page.


Photo “Change in the Sand” (c) Melissa Brumback. Creative Commons License

Agree to use your “professional best” ? You may lose insurance coverage! (law note)

mistakesYesterday, I was part of a panel at the NC Bar Association Construction Law Winter Meeting, discussing insurance issues for design professionals.

One topic we touched on was how to avoid invalidating your insurance.  As most of you know, Errors & Omissions insurance (“E&O” coverage)  is meant to provide coverage for mistakes you may make in performing your professional architecture or engineering services.  E&O coverage is important to protect you in the event of a lawsuit because, as you know, no set of plans is perfect (nor is perfection the standard of care).

Be careful, though.  Do not promise to provide a higher standard of care than the “professional standard“.

If you are asked to sign a contract that states you will use your “professional best,” “best efforts”, “highest care” or similar, you are being asked to sign something that could cost you your E&O coverage.

Examples of such language:

[Architect] [Engineer] shall perform the Services in accordance with the highest standards of professional competence in the industry.

[Architect] [Engineer] shall exercise a high degree of care and diligence in providing the professional services.

Architect’s] [Engineer’s] services shall be of first class quality and free from defects.

E&O policies cover you for failing to meet professional standards, but not in cases where you agree by contract to provide a higher/better/best standard. 

Explain the risks in such language to your owner clients.  No owner will want to put your insurance policy in jeopardy, and they should be willing to strike or modify that language to ensure that your work on the construction project is fully protected and covered by your E&O policy.

Some examples of coverable standards:

All services to be performed shall be performed in a manner consistent with that level of care and skill ordinarily exercised by members of Designer’s profession.

All services shall be performed in a manner consistent with that level of care and skill ordinarily exercised by members of Designer’s profession currently practicing in the location of the project for which the services are rendered, or similar locations.

Remember this, and make sure your future construction contracts contain favorable language that will actually be insurable.  You know– the whole reason you have professional liability insurance in the first place!

Have you ever been asked to agree to provide your best efforts?  How did you handle the situation?  Share in the space below.

They threatened to sue! What do I do? (Law note on construction disputes)

dont panicI just spent some time answering emails from folks worried because they’ve been threatened with a lawsuit over a construction project gone bad.   They want to know:

Can they do that?

What can they get?

But what if I have a good defense?

These are all good questions.  The short answer is that anyone can sue anyone else in America for anything, at almost any time.  HOWEVER, the law is not (generally) a fool.   If someone sues you, but you have a defense or their claim is not well-founded, they almost certainly will not prevail.

Does this mean you can relax?  No, it doesn’t.  You still must take any lawsuit (no matter how ill-conceived) seriously.   Here is what you do:

1. Report any lawsuits, or threats of lawsuits, to your insurance carrier if it involves your errors & omissions professional liability insurance.  Even if you are not sure if it involves E&O claims, report it anyhow.  Early reporting costs nothing but a few minutes of your time. Late reporting could mean you are denied insurance coverage.

2.File an Answer to any lawsuit within the time frame provided.  In North Carolina state court, that is generally 30 days from the date you were “served”, although if you follow certain procedures you can get that extended to day 60.  In North Carolina Federal Court (it will say on the Summons whether it is state or federal, and almost but not all construction disputes are state court), you have 20 days to respond (with extensions allowed if you follow certain other procedures).

Questions?  Leave a comment or shoot me an email.


Can You Change the Scope of Work? Not in a bidding situation! (reader comment)

biddingSetting the Right Expectations for Owner Clients is a must, as I recently wrote in my post discussing Scope of Work clauses.

According to construction consultant Tony Frisby,* scope of work issues are more important than general conditions in the management of a project.

Tony notes, however, that it is not always possible to change Scope of Work clauses in every situation:

“For example, if bidding on advertised procurement, any modifications in the bid may very well be a basis of rejection as non-responsive; the subcontractor is bound the same rule as to the scope of work in the general contract.  In negotiated contracts, two step and design build, of course, the contractor can delineate modifications or exclusions.

In subcontract agreements, we recommend that a Scope Letter do exactly what you have indicated, with emphasis on duties by others, such as hoisting and services provided by others.  Obviously, we recommend the deletion of ridiculous clauses such as No Damages for Delay.”

Tony’s point is a valid one– those dealing with a Bidding situation cannot change the Scope of Work.  Most architects & engineers enjoy more flexibility here than contractors, and can work on scope of work as part of an Request for Proposal response.  Tony’s point about subcontractor agreements is equally applicable to agreements with subconsultants as well.

* Tony Frisby specializes in prevention and non-judicial resolution of construction disputes.  He also assists companies in organizational improvements.

Agree? Disagree?  Share your thoughts with Tony and me, below.

Photo credit: Financial Times via Creative Commons license.

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