Requiring bonds on a construction project is a great way to insure that a project stays on track. In calling for payment and performance bonds, the awarding authority adds another layer of accountability for prime contractors. Because public projects are funded by tax dollars, and because subcontractors and suppliers cannot avail themselves to some of their regular remedies, this extra accountability is a statutory requirement when working on federal and state projects.
The Miller Act establishes this requirement on federal projects, and every state has followed suit by passing Little Miller Act legislation to require bonds on state projects. After a recent private project went awry, a town council member in Hilton Head, South Carolina is considering requiring performance bonds on all major developments on the island. While payment and performance bonds are valuable assets on construction projects, including private ones, they do not cure all problems.
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What are payment and performance bonds?
When a contractor has payment and performance bonds to consider, the contractor has extra incentive to stay on top of a project’s progress and the payment of subcontractors. A payment bond is necessary when working on public projects because public property cannot be liened. Liens are the best tool to make sure payments are made on construction projects, so it makes sense that another remedy should be provided when filing a mechanics lien is off the table. With the ability to file a claim on a payment bond, subcontractors and suppliers receive similar protections to those supplied by a mechanics lien. While great protection for those working on the project, these bonds also help insulate an awarding authority from claims of a subs and suppliers. As we recently learned, these bonds can even protect a public agency when an insolvent surety leaves subcontractors unable to execute their bond claims.
As its name suggests, a performance bond insures that the contract is performed. In the event a contractor struggles to complete work on time or abandons a project altogether, a performance bond puts liability for unfinished work on the surety. Should the issue remain unresolved, a surety would have to either hire someone else to complete the work or pay the full amount of the bond to the awarding authority. Having this tool to make sure projects stay on track greatly helps awarding authorities.
On Hilton Head Island in South Carolina, a private project is suffering from contractor delays and a lien. One city council member suggested that requiring bonds on all major development projects could be a solution.
What’s going on at Sea Turtle Marketplace?
Pineland Station was an outdated shopping center on Hilton Head Island. In order to redevelop the marketplace, Wheeler Real Estate Co., a Virginia based developer, purchased the property. Altogether, the project will encompass 140,000 square feet of commercial space and will cost between $20-30M. As a part of the redevelopment project, the name was changed from Pineland Station to Sea Turtle Marketplace.
The project was originally slated for completion by the summer of 2016, but there have been setbacks. The main issue seems to be the financials of Wheeler Real Estate. In May, Wheeler called for its contractors and subs to cease work while Wheeler sorted out the finances on the project, according to The Island Packet. As a result, Sandcastle Constructors, one of the parties working on the project, filed a lien for just under $900,000. According to the Island Packet article, relationships on the project remain strong and it appears the only issue is payment.
The construction delays have reached nearly 5 months, seriously altering the timeline of the project. As it stands, the project won’t be finished until the beginning of 2017 at the earliest. I guess they’re still better off than the Hartford Baseball Stadium.
As a result of delays, one town council member is wondering if requiring bonds on all major projects could keep this type of problem from happening in the future.
Would requiring bonds cure the woes of Sea Turtle Marketplace?
Probably not. Who would post the bonds? Typically, performance bonds protect owners from a contractor’s failure to perform. Here, the awarding authority (property owner) is Wheeler Real Estate. Considering the issues all rise from Wheeler – the subcontractors are all waiting in the wings – a performance bond posted by the prime contractor would be pretty useless. If the city required a land owner or developer post a performance bond in order to obtain the proper permitting for a large construction project, the city would be able to enforce performance. Nevertheless, under the typical operation of posting payment and performance bonds on a private project, Sea Turtle Marketplace would not have benefitted from a performance bond that only the developer/root of the problem could enforce. Payment and performance bonds can be a valuable tool on public and private projects alike, but when the problem starts with he property owner, bonds may not be of much use.
For questions about the bonds required by the Miller Act, here are our Federal Miller Act FAQs. For information on a state’s Little Miller Act, we have the full text of nationwide Little Miller Acts available.