Why Should the Condominium Association Require Bonds from the Renovation Contractor
We often encounter Condominium Associations who have difficulty understanding why they should bond their exterior renovation contract. Many Associations consider it money wasted on another layer of liability protection when they would rather spend the money on actual scope – sticks, bricks, and finishes. They do not expect the surety to pay the claims even if they are made against the Contractor’s Performance and Payment Bonds.
Association Boards often ask, “Isn’t the risk already covered by all the insurance required from the Contractor?” The short answer is, “No”, and here’s why.
A performance bond, unlike insurance, assures the Association that the Contractor, or its Surety, will complete the project even if the contractor goes bankrupt or cannot competently perform to complete the contract. In addition, sometimes a Surety can be required to pay Association claims for work not properly performed even after occupancy. See, Federal Ins. Co. v. The Southwest Florida Retirement Center, Inc., 707 So. 2d 1119 (Fla. 1998).
A payment bond, on the other hand, assures the Association that the Contractor will pay the subcontractors and suppliers under the contract terms agreed between the Association and the Contractor. The payment bond protects the Association from having construction liens recorded on its project, provided the Association properly records the Bond with the Notice of Commencement. Most Associations understand that they do not want unpaid subcontractors and suppliers recording liens on their property, but they are loathe to get into the technical and complex quagmire that is the lien law. Thus, the Surety provides assurance to the Association for both the Contractor’s performance and payment to third parties.
Performance and Payment Bonds are issued together to the Association and to the Contractor once he can demonstrate his creditworthiness. The Surety issues the bonds only after its audit of the Contractor’s contract balances, payment history, and contract performance. In turn, the Surety protects itself by obtaining a General Indemnity Agreement from the Contractor and any spouse, personally, to reimburse the Surety if it is required to pay out Contractor claims on the project.
“But,” you say, “we already know this contractor and we have already determined that he is qualified.” We say, “But wait… There’s more.”
A bonded Contractor is not only accountable for its performance to the Association. The Contractor is also accountable to the Surety, with whom it enjoys a necessary relationship for continued business with public and private owners. Before the surety ever issues the bonds, its underwriters examine the Contractor’s books, records, and practices to evaluate the kinds of contracts completed, the status and payment history under contracts underway, when and why a contractor was sued, if ever, and generally a contractor’s operational practices, i.e., – does the contractor pay its subcontractors, suppliers, and other third parties properly and timely? A bondable contractor tends to be the qualified contractor both because of quality performance in the past and because of responsible business practices. If you want more information about construction bonds, their benefits, and whether your construction contract warrants surety protection, please contact us.