When a contractor secures a construction bond, the surety agrees to cover claims against the bond up to a specific limit. Any time there’s a change to a project that could affect that bond, the surety needs to sign off. This is known as Consent of Surety, and it’s an essential part of navigating a construction project when a bond is present.
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What is Consent of Surety?
Consent of Surety is basically a confirmation from the bond surety that they support a particular action that could impact the bond, and more importantly, that could impact their liability. The owner, general contractor, or subcontractor may need Consent of Surety before they take certain actions.
Getting consent from the surety is how a bonded party or obligee can ensure that they’re covered by the bond if they move forward.
Whether it is covering payment, performance, bids, the release of final payment, or something else, a bond isn’t a license to print money. The surety issues a bond to provide a guarantee up to a specific amount. Ultimately, the bond provider wants to prevent claims against the bond and minimize its costs. As a result, they will often scrutinize changes to a project that could lead to bond claims.
It’s important to understand that Consent of Surety can have many meanings, and its meaning depends on the context. Consent, as it applies to a performance bond, can be different than how it applies to the bid process.
When Consent of Surety is Used in Construction
Throughout the span of a project, there could be several times when getting Consent of Surety is a requirement for moving forward. A project owner may require that the general contractor or sub get consent before awarding the project. Also, a subcontractor might request it from the GC or owner before agreeing to a significant change.
If the surety doesn’t agree to consent, the bond principal may need to increase their bond limit to cover the anticipated price increases.
Bids, final payments, change orders, or any number of other scenarios could require the obligee or bonded party to get Consent of Surety. Here are a few more scenarios.
During the bidding phase, a subcontractor may need to include Consent of Surety with their bid. At this stage, Consent of Surety serves as proof from the bond surety that it will provide a performance bond if the contractor gets the job. It’s also called an Agreement to Bond, which is a term some contractors may be more familiar with.
In some ways, Consent of Surety at this point is similar to a bid bond. It’s a guarantee that the bonding surety will provide a performance bond for the bid amount.
However, consent is not an actual bond, and the bidding contractor doesn’t have to sign a contract for the bid amount. It’s merely a way for an owner to ensure that the contractor has a surety willing to cover their performance bond if they are selected.
Change orders can have a significant impact on a contract’s value, which can affect the surety. Before an owner moves forward with a substantial change order, or several smaller change orders, it would be wise to check with the contractor’s surety. If the surety doesn’t provide consent to the change, the owner may not be able to file a claim against the performance bond for the full amount.
Significant change orders can occur between the owner and the general contractor, as well. It’s a good idea for the contractor to request Consent of Surety for the payment bond in these cases.
Consent of Surety to Final Payment
When it comes to final payment, the property owner will typically be required to get Consent of Surety before any final payments are released on the project. Consent of Surety to final payment, at this point, ensures the owner that the surety is aware of and approves the amount they’re paying out to the contractor. It ensures that the owner will have a bond to place a claim against should they have to. This is especially important before releasing retainage.
The American Institute of Architects (AIA) has a form specifically for these purposes. The AIA G707 Consent of Surety to Final Payment form states that the surety involved approves the final payment to the contractor. The AIA Consent of Surety to Final Payment form also explicitly states that the surety agrees that final payment to the Contractor shall not relieve the surety of any of its obligations to the owner as set forth in the surety bond.
This form is typically used in conjunction with an AIA G706 Contractor’s Affidavit of Payment listing any remaining indebtedness or known claims in connection with the construction contract.
How to Get Consent of Surety
In most cases, it’s up to the bond obligee to request Consent of Surety from the bonding surety. A sub needs to reach out to the payment bond surety and request the Consent before agreeing to a change order.
If they don’t get the consent, the change order may put their payment in jeopardy. They may not have a claim against the payment bond if getting paid for the change becomes an issue.
Owners looking to cover themselves should also reach out to performance bond sureties before agreeing to final payments. If they don’t, they could be agreeing to pay the contractor more than the surety is willing to cover.
This could be a significant problem if the work turns out to be unsatisfactory. The owner may not be able to recover enough from the bond to hire another contractor to fix the problems.
However, during the bid process, it’s usually the subcontractor’s job to supply the Consent of Surety with their bid application. In many cases, the surety won’t even charge for this service, as they’re more interested in providing the bond for the overall contract.
How Consent of Surety Affects Payment
Anytime you add an extra piece the payment puzzle, it complicates the payment process. Consent of Surety creates a small but additional hurdle that subs have to be aware of while trying to get paid.
The act of getting Consent of Surety ahead of time isn’t very difficult. Having it helps to streamline the payment process, so it’s worth getting whenever a significant change occurs. Even if the owner doesn’t request it on their behalf, it may be worth getting on your own.
Consider a scenario where a sub didn’t get Consent of Surety for a payment bond before agreeing to a significant change order. When it comes time for payment and the owner balks at the amount, the surety may not cover the full amount. This could leave the sub’s payment in limbo.
Another example could be at final payment. An owner may request Consent of Surety for a particular amount as part of the project closeout. The surety may not provide it if the amount is more than what they’re willing to cover your work for. As a result, the owner may withhold your payment and retainage.
An ounce of prevention is worth a pound of cure, though. A contractor can avoid scenarios like these by requesting Consent of Surety anytime a change affects the contract amount when a bond is present on the project.