One of the fundamental differences between construction contracts for public projects and those for private projects; are the claims that unpaid parties can make. Specifically, while unpaid subcontractors and suppliers on private projects can file mechanics liens, on public projects those unpaid parties must file claims on a general contractor’s payment bond. General contractors on public projects, in fact, must generally take out two bonds, a payment bond and a performance bond. What happens when the contract price increases through a change order, though? Do the amounts of the bonds increase as well, to cover the new amounts?
How change orders that increase the contract price affect payment bonds
Construction projects rarely go as planned. Which is why the proper use of change orders is so crucial. Once authorized, they allow for the increase in, not only the scope of the work, but an increase in price of the contract (if necessary). Increases in the contract price can be the result of a number of different factors; such as material price increases, unanticipated delays to the project schedule, and so on.
So when a change order increases the contract price, how does that affect the payment bond? Does the increase need to be approved by the surety? There’s no straightforward answer, to this relatively common question.
The answer ultimately comes down to the specific language of the payment bond agreement.
Surety approval required
This isn’t an all or nothing scenario, some bonds will require every contract price increase to be approved by the surety. Under bond agreements where every increase requires surety approval, communication is key. The surety will be actively involved throughout the project.
Other bonds may require increases to be approved depending on the the amount of the increase. For example, any increase over 10% of the contract price and every subsequent increase will need approval by the surety. If this sounds exhausting, you’re right. Not only will you need approval for any increase of some percentage, but once that percentage has been reached, every additional increase (no matter how small) will also require approval.
These approvals will typically come in the form of an amendment to the bond agreement increasing the amount of protection under the payment bond. This can be a time-consuming and burdensome process. Sureties will be, understandably, skeptical of any increases in their liability to pay. That being said, the surety company will likely want to perform some due diligence. Investigating whether the increase is merited and how the increase affects the contractor’s payment for the bond.
Surety approval not required
Lastly, some bond agreement don’t require any surety approval for contract increases. This is due to a provision that automatically binds the surety to any executed change orders. Not requiring surety approval is clearly the most streamlined way to deal with project changes. And also, best case scenario for subcontractors or suppliers who may need to file a bond claim. Most standardized performance bond agreement will include such a provision. Take the AIA A312-2010 Performance Bond;
§10. The Surety hereby waives notice of any change, including changes of time, to the Construction Contract or to related subcontracts, purchase orders, and other obligations.
Always get a copy of the payment bond
Accepting public works projects can be lucrative, but come with their own specific challenges. Before starting work on any such project be sure to get yourself a copy of the payment bond. This is one of the most important steps to take to protect your rights to payment on government jobs. It will provide the information necessary for any notices and claims, and will also govern how change orders and contract price increases will be dealt with. Always request a copy of the bond! In fact, you’re legally entitled to receive a copy.
Once you’ve got a copy in hand, review how contract price increases are dealt with by the bonding company. If increases do require approvals, then it’s important to be prepared for the approval process. That means keeping lines of communication between you, the general contractor, and the surety open.
Follow change order procedures carefully
Furthermore, you’ll need to be proactive and patient. Many contractors make the mistake of performing extra work without a written and signed change order, or not following the required format or procedures. Here are just three examples:
- Change Order Format Can Make or Break Your Claim
- Subcontractor in VT Loses Claim After Failing to Request Change Order for Extra Work
- Kansas Sub Loses Lawsuit Over Unapproved Change Orders
When working on public projects, the surety approval (if required) is just another added step in this process. Don’t make that mistake. If your extra work is never officially approved, you’ll have a hard time collecting payment. Not only from your hiring party, but the payment bond surety as well.