Civil Engineering Reference
In-Depth Information
and the quality of the DB contractor's management skills, experience, and resources,
availability of capital, and overall adequacy of financial strength to support the work and
any indemnity obligation. All risks unique to DB are assessed, even if the surety is suc-
cessful in limiting its bond obligation to the construction portion of the contract, because
risks not covered by the bond nevertheless can have a significant impact on the overall
financial integrity of the contractor.
Risk assessment thus involves two levels of analysis: (1) DB risks that are covered by
the bond; and (2) DB risks that are outside of bond coverage and could impact the DB
contractor's capacity to perform and honor its indemnity obligation, both as to the DB
contract as well as other uncompleted bonded contracts. This two-step analysis is essen-
tial to careful surety underwriting.
First Level of Analysis: Design-Build Risks Covered by the Bond
The surety's liability under its bond mirrors that of the DB contractor under the bonded
contract, unless the bond itself limits the surety's liability to specific types of risks, specific
duration of exposure to risk, or specific limits of liability. Performance bonds tradition-
ally limit the surety's exposure expressly to a stated dollar amount (i.e., penal sum) and to
a specific duration, which is usually until substantial completion or final payment of the
project. Bond coverage for DB projects can be written either to cover both the design and
construction scopes, or to exclude design risks and cover construction only.
The practical advantages to an owner receiving a surety bond that assures perfor-
mance of both the design and construction services required under the contract are obvi-
ous. The owner only has to work with the contractor and surety for any and all concerns
under the contract and bond. One concern for sureties is bonding the design in DB proj-
ects. It is much more difficult for a surety to evaluate design risk when the project has
not yet been designed, and the surety is asked to provide a bond. Further, assuming that
design liability extends the surety's liability under the bond, this additional surety risk can
influence bond pricing for DB projects and may limit the contractors for whom a surety
is willing to issue bonds.
As an alternative, a surety may offer a construction-only bond, which guarantees the
contractor's performance of the construction, but excludes any design risks. Some states,
such as California, have DB legislation that provides for construction-only bonds for DB
projects. A construction-only bond places the design risk strictly on the DB contractor,
who agrees to that risk in the DB contract, and the DB contractor's insurer. Although the
DB contractor offers the owner a single point of contact for both design and construction,
the guarantees for the work are divided between the DB contractor's insurer for design
and the DB contractor's surety for construction. Design work should always be insured
with a professional liability/errors and omissions policy (see chapter 12).
The surety will always have concerns with design coverage being in the scope of its
bond. Because the surety's risk analysis in a construction-only scenario is somewhat closer
to the widely used DBB approach, bond pricing may be more affordable and more con-
tractors may be able to obtain bonding and bid on the project.
The construction-only approach to bonding of DB contracts has been strongly
criticized:
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