Tag Archives: public projects

NC surety bonds- what they are; how they work (Guest Post)

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checking the bondToday, another guest post– this time from Danielle Rodabaugh, a principal for Surety Bonds.com, an agency that issues surety bonds to individuals and businesses throughout the nation. She aims to clarify bonding rules & regulations, and has recently been focusing on construction/contract bonds. Danielle will be discussing bonding issues within the North Carolina construction industry.

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Reliable professionals working in the construction industry want to guarantee the quality of their work to their clients, and that’s where surety bonds come in. In construction, contract (or construction) bonds are a type of surety bond utilized to ensure that professionals follow regulations and make appropriate decisions while working on a project. Construction bonds typically protect the client and work similarly to insurance—although they offer a different kind of protection.

What’s a surety bond?
In the construction industry a surety bond is essentially a legal agreement between three parties to help ensure the fulfillment of a contract:

  1. Obligee–typically the developer or worker who receives the protection of the bond, guaranteeing that the contractor fully completes the project
  2. Principal–the contractor who gets the bond, guaranteeing that they will fulfill various aspects of the project as outlined in the contract
  3. Surety–the agency who issues the bond to the principal, thus backing the contractor’s work and acting as an intermediary between the contractor and obligee

There are three main types of construction bonds that are utilized in North Carolina:

  • bid bonds
  • performance bonds
  • payment bonds

Each of these bonds plays a different role in guaranteeing the work of a contractor throughout a project’s duration. North Carolina surety bond agencies have the ability to issue construction bonds to qualifying professionals who want to take advantage of their benefits. Unfortunately, many working in the construction industry are still unaware of the legal financial protection offered by construction bonds.

 

Bid Bond Issues in North Carolina
Bid bonds guarantee a developer that—if selected—a contractor will agree to work on a project for the amount proposed in the original bid. This guards against contractors who might try to increase their bid on a project after being contracted by the developer. With a bid bond in place, the developer may collect appropriate reparation if the contractor breaks the bond’s terms. If such a situation arises, the resulting compensation is typically calculated by how much more the developer has to pay to contract the next-lowest bidder for the project. If the contractor does not have the ability to adequately compensate the developer the surety becomes responsible for paying reparation up to the bond’s full value.

Although North Carolina state law does not require the use of bid bonds on either private or public construction projects, a developer may still choose to require them as an added form of protection. According to N.C. Gen. Stat. s. 143-129, which outlines the procedure for letting of public contracts, North Carolina contractors must provide an upfront deposit in the amount of 5% of the total bid when submitting their bid. The language explains that a contractor may choose to provide a bid bond in lieu of making the required cash deposit. Bid bonds can be especially helpful for new contractors who may not have the necessary cash on hand for the collateral, as the surety would financially back the contractor’s bid.

 

Performance Bond Issues in North Carolina
Contractors secure performance bonds to guarantee that they will perform all aspects of a project as outlined in the contract. Should the contractor fail to complete the project satisfactorily, the performance bond allows the developer to regain appropriate compensation. If the contractor cannot pay the reparation then the performance bond instructs the surety to step in. Depending on the situation, the surety might be responsible for paying retribution up to the bond’s full face value for any extra fees incurred as a result of the contractor’s incomplete work.

Performance bonds are not required for private projects in North Carolina, however some regulations mandate their use for certain public ones. For example, the use of performance bonds is required when any government entity enters into a construction contract in an amount more than $100,000. Furthermore, they are also required for any other public construction project that exceeds $15,000, no matter the developer or specific contract. Additionally, any developer has the right to require a selected contractor to get a performance bond prior to a project, which especially benefits the developers of private projects or smaller projects that cost less than $15,000. All state-mandated performance bonds must be issued for 100% of the project’s contracted cost.

 

Payment Bond Issues in North Carolina
Payment bonds are put in place to make sure that contractors will pay all labor and material costs as outlined in the contract. Because mechanic’s liens—which ensure payment of outstanding debts upon sale of a property—can only be used on private property projects, payment bonds are essential to making sure that all bills are paid in full. Subcontractors (or other workers) can make a claim on the bond if a contractor does not make the appropriate payments, allowing them to recover deserved compensation.

Simply put, payment bonds are required on all projects that mandate the use of performance bonds. North Carolina General Statute 44A-27 explains that any professional working on a bonded project who is not paid for his labor within 90 days has the ability to make a claim on the bond. Private projects in North Carolina do not require the use of payment bonds, although these individuals may elect to use them at their own discretion. This goes to show that although bonds are not always be required in North Carolina, they are most certainly enforced. Oftentimes this means that individuals working within North Carolina’s construction industry must take the initiative to utilize construction bonds.

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Danielle and I welcome your thoughts, comments, and questions about surety bonds in the comments section, below.

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Photo “Checking the bond” by Stephen via Picasa/Creative Commons License.

Tues Tip | NC HUB Requirements for state construction projects

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If you bid on state work in North Carolina, or want to, you should be aware of the Office for Historically Underutilized Businesses (HUB).   [You should also be aware that there may be changes coming soon in light of a recent 4th Circuit Decision with regard to who still qualifies as a HUB.]

Historically Underutilized Businesses logo

1.  What does the HUB office do?

The HUB office is set up to:

  • help qualifying companies become listed vendors in their database
  • help contractors find HUB companies to solicit subcontractor bids from
  • answer questions about the HUB process for bidders

2.  Who qualifies as a HUB business?

By statute, a HUB business is one in which at least 51% ownership and control is held by minorities, women, disabled, and/or disadvantaged owners.  If you think you qualify, get certified! It can only give you more opportunities for public work.

3.  If I bid on a state contract, how do I comply with the HUB requirements?

Under the HUB statute, each bidder must do one of the following:

  •  identify on his bid the minority businesses that will be used and for what percentage of the contract;
  • sign an affidavit and provide documentation listing the good faith efforts to comply [see below]; or
  • sign an affidavit that all work will be self-performed

4.  What activities qualify as “good faith efforts” to identify a HUB subcontractor?

The statute provides that good faith efforts include:

(1)        Contacting minority businesses that reasonably could have been expected to submit a quote and that were known to the contractor or available on State or local government maintained lists at least 10 days before the bid or proposal date and notifying them of the nature and scope of the work to be performed.

(2)        Making the construction plans, specifications and requirements available for review by prospective minority businesses, or providing these documents to them at least 10 days before the bid or proposals are due.

(3)        Breaking down or combining elements of work into economically feasible units to facilitate minority participation.

(4)        Working with minority trade, community, or contractor organizations identified by the Office of Historically Underutilized Businesses and included in the bid documents that provide assistance in recruitment of minority businesses.

(5)        Attending any prebid meetings scheduled by the public owner.

(6)        Providing assistance in getting required bonding or insurance or providing alternatives to bonding or insurance for subcontractors.

(7)        Negotiating in good faith with interested minority businesses and not rejecting them as unqualified without sound reasons based on their capabilities. Any rejection of a minority business based on lack of qualification should have the reasons documented in writing.

(8)        Providing assistance to an otherwise qualified minority business in need of equipment, loan capital, lines of credit, or joint pay agreements to secure loans, supplies, or letters of credit, including waiving credit that is ordinarily required. Assisting minority businesses in obtaining the same unit pricing with the bidder’s suppliers in order to help minority businesses in establishing credit.

(9)        Negotiating joint venture and partnership arrangements with minority businesses in order to increase opportunities for minority business participation on a public construction or repair project when possible.

(10)      Providing quick pay agreements and policies to enable minority contractors and suppliers to meet cash‑flow demands.

Depending on which public entity is involved, different weight may be assigned to different parts of this criteria, or additional criteria may be required.

5.  What documentation is necessary to prove good faith efforts?

The short answer is, “it depends”.  The statute requires “all” documentation be provided.  If you are telephoning minority businesses and getting verbal denials, you must find a way to document that.  Better practice would be to send written requests for bids to HUB-certified businesses, so you can maintain a copy for submission with your bid.  The HUB website even has instructions for creating a HUB vendor/contractor Excel spreadsheet to track your efforts.

6.  Is the HUB process related to my local MBE/WBE [Minority-owned/Women-owned  Business Enterprise] certification?

As of last summer, there is now a statewide process to getting certified, the Statewide Uniform Certification (SWUC).  This change was made to streamline and centralize the HUB certification process and HUB database.

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Logo from NCDOA HUB website.

 

NC Construction Law Seminar in Greensboro

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Excuse the little self-promotion here, but if you want a quick way to learn more about construction issues in North Carolina, I’m speaking at a seminar on May 7, 2010 in Greensboro, NC.

The seminar topics include:
* Understanding Liens, Bonds, and Payment Issues
* Risk Transfer (including insurance and indemnity issues)
* Making Changes & Resolving Disputes during the Construction Process
* Contracts and Subcontracts on Public Projects
* Recent Bankruptcy Cases Impacting Contractors’ Lien Rights

The seminar qualifies for 6.0 PDHs for NC Engineers, 0.6 CSI CEUs, and NC Attorney CLE credit is pending.

Joining me in speaking are Eric Biesecker, Jennifer Maldonado, and Brian Edlin. For more details or to register, go to Half Moon Seminars.