Bonding Design-Build Projects - Design-Build for Water and Wastewater Projects - page 137

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Bonding Design-Build Projects
Joanne S. Brooks Esq., The Hanover Insurance Group, and
Patrick J. O'Connor, Faegre & Benson LLP
INTRODUCTION
The traditional description of the surety bond is that it is a tripartite (i.e., three-sided)
agreement in which one party (i.e., the surety) agrees to perform the obligations of another
party (i.e., the principal or contractor) for the benefit of a third party (i.e., the obligee or
the owner). That description, while accurate, does not explain the purpose and value of
surety bonds, and this chapter provides an introduction to the role, importance, and strat-
egies of surety companies in the water and wastewater construction industry.
A surety bond is a credit transaction. A surety “lends” bond credit to an entity per-
forming construction (referred to generically as the contractor herein for DB, DBB, or
other project delivery approaches), much in the same way that a lender may provide loans
to a land developer. The form of the credit differs from that of a true lender: the surety
commits its financial resources to the performance of the contractor's contractual obliga-
tions in the event the contractor fails to perform and the obligee, in this case the owner,
requests action on the contractor's commitments.
When considering the surety bonding needs for a DB project, owners and practition-
ers should recognize that an axiom of surety law is that “the surety's undertaking is no
greater than that of its principal,” or in this case, the contractor. In other words, the surety
is responsible for performing the contractor's obligations in the event of the DB contractor's
default when the owner has met all the conditions of the bond. As a consequence of this
arrangement, sureties are quite interested in what the contractor has agreed to perform.
The particular project delivery approach (i.e., traditional DBB versus DB) that the
contractor has agreed to perform its services under is also of importance to the surety.
It is normal for the surety, in the course of its due diligence, to evaluate the terms of the
construction contract, including the delivery approach under which the services will be
provided. The DB delivery approach raises several issues for the surety that are not nor-
mally encountered in traditional DBB or CMAR.
In this chapter, the general role of a surety in construction projects is discussed
first, followed by surety risk evaluations and strategies for DBB and DB projects. This
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