This Concrete Subcontractor has a big problem. How would you solve it?
Facts:
- The bond applicant, we will call ‘Subby,’ is a highly experienced subcontractor who performed concrete work on a school job.
- Subby was not required to give a Performance & Payment Bond to the GC.
- The GC, “Gigunda Const.,” has given a P&P bond to the school district.
- The GC claims that the concrete Subby installed has failed a critical strength test. As a result, Gigunda is demanding a 2 year maintenance bond to cover potential defects.
- Subby has disputed this charge and feels they are in compliance with the contract.
- Since the requested maintenance bond will run to the GC and not the school district, it appears the issue must arise from within the subcontract terms (not directly with the school district).
- Subby has an ongoing relationship with a major bonding company: “Wonderful Surety.”
- Wonderful Surety has refused to provide the maintenance bond.
- Subby’s agent called us for help. Is it possible some of our sureties may support it?
Issues
- The work is not covered by a performance bond.
- Subby’s current surety has refused to support them.
- If Subby ignores the problem, the GC may ultimately have a performance claim on their bond. The GC, and their surety, are responsible for the entire project, including the subcontracted work.
- If Subby ignores the problem, the GC may have to fix it – and will back charge them for the costs.
- If Subby doesn’t provide the maintenance bond, the GC will withhold the remaining money in their sub contract.
- Gigunda’s subcontract may have imposed the GC contract conditions automatically on to the subs (possibly including concrete strength requirements).
- It would be normal for the subcontract to state that Subby must protect Gigunda from claims arising from their work.
Possible Solutions – Which One Do You Like Best?
- Subby can ask a new surety to provide the maintenance bond.
- Subby can rip out the questionable work at their own expense and re-do it to Gigunda’s satisfaction.
- Subby can review the subcontract to determine what strength requirements were indicated, and if Subby is actually in violation.
- Gigunda can press their surety to issue the maintenance bond. (Although this would be unlikley if Gigunda is the beneficiary.)
- Subby could refuse to get the maintenance bond or replace the work (do nothing.)
- Subby could ask Gigunda for a contract amendment providing additional money to rip out / replace the questionable work.
- Subby could let Gigunda hold money for 2 years in lieu of the bond (the entire bond amount).
So you chose: #_____
Conclusion
The next step we recommend is #3, “review the subcontract requirements.”
Subby is an experienced concrete company that is convinced their work product is correct. They are not aware of the strength requirements that are the basis of this dispute – but a careful legal review is needed.
Subby should also ask the GC to cite where these strength requirements appear in the subcontract.
If the work is in violation of the subcontract, Subby will have to choose between paying to replace it now, or face the difficult task of obtaining the maintenance bond. It is possible that no surety will support this without requiring substantial collateral, or maybe even full collateral.
Pretty tough, but the bond would offer some important advantages even if full collateral is required:
- Subby could totally avoid the cost of replacing the work if the concrete performs successfully. Only time will tell, and filing the bond gives them that time.
- The bond is better for Subby than letting Gigunda hold funds. If Gigunda concludes the concrete has failed during the 2 years, they will have to go through the surety’s claim department for recovery. That’s better than just letting the GC use their money if they want. This type of advantage always exists for bond applicants when choosing between a surety bond or putting up cash directly with an obligee / beneficiary.