In parts one and two of this four-part series, the Miami construction litigation attorneys at Cotney Construction Law discussed megaprojects, large-scale public and private construction projects valued in excess of $1 billion. As we’ve discussed, megaprojects are high risk, high reward projects for contractors, and only certain contractors will meet the criteria for engaging with owners who are funding such projects. Since insuring these projects can be a challenge, owners are forced to be extremely selective when choosing contractors, which, in turn, requires contractors to maintain transparency and, in some cases, assist owners with the development of an accurate insurance coverage matrix.
However, the most important tool for driving a project forward according to the terms of the contract is arguably the various types of bonds put in place to maintain accountability among owners and contractors working together to complete megaprojects. In this article, we’ll discuss payment and performance bonds as they are related to megaprojects.
Are Bonds Mandatory?
When it comes to public infrastructure projects, payment and performance bonds are generally mandatory. For most projects, these bonds are required for the full dollar value. However, megaprojects require bonds equal to a significant percentage of the total contract value. For instance, in Florida, contracts worth $250 million or less require 100 percent bonds. Projects exceeding this value require bonds of a reasonable amount. Private projects can also benefit from bonds as they bolster accountability among all parties. It’s highly recommended that contractors working with private owners on megaprojects procure the payment and performance bonds.
Payment bonds are utilized to guarantee that contractors pay subcontractors and suppliers according to the terms of the contract. They are a type of surety bond that effectively reduces the opportunity for payment disputes. They also help expedite payments so subcontractors aren’t forced to wait for a contractor to provide due compensation. Payment bonds keep compensatory information above board and ensure that compliance with state and federal law is observed.
The surety is tasked with investigating claims made against the contractor with which the payment bond was established. Claimants can receive compensation equal to the full amount of the payment bond if they can back their claim and prove it is legitimate. The contractor is then responsible for recompensing the surety. In other words, the payment bond establishes liability for the contractor bringing other entities into the fold during the course of a megaproject and helps everyone get paid when the contractor fails to meet the terms of the contract.
If payment bonds certify that subcontractors will be paid, what guarantees the contractor will be paid by the owner? That’s the job of a performance bond, which guarantees payment upon significant completion of a project. Our Miami construction litigation attorneys will discuss performance bonds in part four.
Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.