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.
