ConstructionPro Week, Volume: 1 - Issue: 33 - 12/21/2012

Can Change Orders Jeopardize Bond Protection?

By Bruce Jervis

 

Project owners, for their own protection, require contractors to furnish payment and performance bonds. Contractors require subcontractors to furnish bonds for the same reason. The bonds incorporate the terms of the construction contract or subcontract by reference. And those contracts authorize alteration through change orders. But what if the surety discovers that the change order process has radically altered the contract it originally agreed to cover? Is the surety discharged of its bond obligations?

 

In a recent federal appellate case, a prime contractor and its subcontractor settled a delay dispute by negotiating a bilateral change order. New completion deadlines were established for the subcontractor. Liquidated damages for late completion were now imposed on the sub. The prime contractor subsequently terminated the subcontract for default and moved against the sub’s performance bond. The sub’s surety said, in effect, “This is not the subcontract we agreed to bond.”

 

Can project owners and contractors issue change orders without concern for the impact on bond coverage? Or should the surety be consulted regarding every change? The change order process is already difficult and contentious. Is it really feasible to bring an additional party into the process? And when does a routine change, clearly contemplated under the terms of the contract, become a material change, fundamentally altering the risk the surety agreed to assume? I welcome your comments.

 

COMMENTS

Bruce, why don't you cite the cases you refer to so we can see the larger story?
Posted by: tom hughes - Friday, December 21, 2012 11:55 AM


This issue isn't much different than most Assignmet Letters and Certifications that Lenders requireof Owners, Architects and Contractors, in that they usually have language requiring Lender prior approval of change orders. When was the last time anyone had a written approval of the Lender to Change Order?
Posted by: Terry Herr - Friday, December 21, 2012 11:57 AM


I think the case Bruce is referring to is: UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT,No. 12-1014,

GREAT AMERICAN INSURANCE COMPANY,

v.

HINKLE CONTRACTING CORPORATION. It should be noted however that the Court did not decide the present issue of change order effect upon bond obligations; it was decided on arbitrability grounds.
Posted by: David Elia - Friday, December 21, 2012 1:50 PM


Wow, a couple of PM screwups here. First, how did the sub get so messed up in the first place (somehow, I suspect the owner and prime have some blame in it)? And, why did the prime and owner agree to "allow" the sub to continue non performing to the point of termination?
Posted by: Turbodave - Sunday, December 23, 2012 5:41 PM


 









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