Bonding Design-Build Projects - Design-Build for Water and Wastewater Projects - page 138

discussion provides a greater understanding of how surety bonds are incorporated into
contracts and how they are executed in the event of defaults.

ROLE OF THE SURETY IN WATER AND
WASTEWATER CONSTRUCTION PROJECTS

In nearly all public projects, owners will require a surety bond, either because of legal stat-
utes or owner organization requirements. Sureties provide such bonds to the contractors
for the benefit of the owner and those supplying labor or materials to the project, and they
become part of the final agreement. When design-builders are submitting proposals, they
are usually required to show proof, in the form of a letter from a reputable surety, that the
design-builder can acquire a surety bond for the project.
A surety will base its ability and desire to bond the project by reviewing the contrac-
tor's financial position, experience and ability, the terms of the bonded contract, and the
owner's contract funds and obligations. Also, because sureties have provided a valued
service for hundreds of years, the surety has well-established common law and equitable
rights and remedies (Table 11-1) to secure its services.
The surety is also entitled to assert the claims, counterclaims, and defenses of the
party, such as the contractor, on whose behalf it acted. If the surety paid a payment bond
claimant such as the subcontractor or supplier, the surety can assert the claims held by
that claimant against the contractor and the owner. Conversely, if the surety performed
the work of the contractor, the surety can assert the contractor's claims against the owner
for changes, breach of contract, and so on.
These legal rights and remedies typically are documented in a General Agreement of
Indemnity between the contractor and the surety. Sureties frequently require that contrac-
tors, on whose behalf they issue bonds, execute indemnity agreements with their surety
that promise to make them whole in the event of loss occasioned by the issuance of their
bond. Individuals having a financial interest in the contractor, such as the construction

Table 11-1. Rig hts and remedies of surety firms

Title Description

Indemnity Because the surety stands behind the DB contractor's promise to perform

an obligation, the DB contractor must indemnify, or pay back, the
surety for all loss and expense that the surety incurs if the DB contractor
fails to honor its obligations and the surety has to perform.

Exoneration If an owner makes a claim against the surety, the surety can demand that

the DB contractor perform or pay before the surety is required to do so.

Subrogation This is perhaps the most important common law right. This right entitles

the surety to “step into the shoes” of the contractor and owner when
the surety has performed the contractor's obligations and therefore has
provided a benefit to the owner. Under these circumstances, the surety
is entitled to secure the benefits of the underlying construction contract;
the most common benefit being the right to recover the remaining
contract proceeds (Bruner and O'Connor 2002).