A business chooses a contractor to handle the expansion of a commercial building, but halfway through the project there is a misunderstanding, the contractor walks off the job, and the two end up fighting in court. Or a contractor prosecutes a project according to plans and specifications, but the project owner terminates the contract after a breakdown in communication, and the two end up fighting in court.
Thankfully, these scenarios happen infrequently because most business owners and contractors in Hawaii understand the need for surety support for their construction projects. What is less understood by both parties to construction contracts is the importance of involving the surety company the moment an issue arises.
In legal terms, contract surety is a project owner and contractor entering into a contract, and the surety providing a bond on behalf of the contractor to the project owner wherein the surety guarantees that the commitments made by the contractor (or principal) to the project owner (or obligee) under the contract will be kept. For a project owner, requiring surety support in the form of performance and payment bonds gives them the assurance their project will be completed according to the terms, conditions and specifications agreed to within the contract. Likewise, most of Hawaii’s contractors are knowledgeable about the need to provide surety credit to project owners, and have built solid, long-term, mutually beneficial relationships with their surety companies.
When projects run according to schedule, plan and spec, there is generally no need to involve the surety, other than for the standard job site visit. However, things do not always proceed according to plan. On any bonded project where either the project owner or the contractor thinks something is going awry, it is imperative they involve the surety from the start.
A breakdown in communication between project owners and contractors. Most construction contracts require alternate dispute resolution, such as arbitration, which is always better than an extensive legal battle. However, project owners and contractors are both served by bringing up potential issues on a bonded project with the surety as soon as possible. The surety has a legal, ethical, and fiduciary responsibility to both the project owner and the contractor. As an objective third party, the surety can help facilitate resolution and prevent claims or defaults.
A breakdown in communication between general/prime contractors and subcontractors. Surety companies provide surety credit to general/prime contractors and to subcontractors. In the same way the surety represents the interests of both parties to a prime contract, it also represents the interests of both parties to a subcontract. Most subcontracts also require alternate dispute resolution prior to litigation. Nevertheless, general/prime contractors and subcontractors can help prevent a situation from deteriorating into a claim or default by bringing any issues to the surety’s attention as soon as possible.
Contractor business issues. Contractors should remember that the surety is more than just a provider of surety credit; they are also a business partner. With its in-depth knowledge of the contractor’s business operation, the surety can serve as a resource in navigating many of the difficult situations the contractor may encounter during daily business operations. Bringing the surety into a situation from the start may make the difference between remaining a profitable and viable entity and having to shut down the operation.
Ultimately, the surety is committed to the successful completion of a bonded project. Project owners, contractors, and subcontractors are all protected by clear and timely communication with the surety. Contact your independent agent for information about FICOH’s surety offerings or to scheduling a meeting with our surety team.