Secrets of Bonding #7: Bond Forms

This probably sounds like a boring subject. “Mundane” comes to my mind. But you’d be surprised how important it can be.  The bond form can bring an agent’s production opportunity to a screeching halt.  They can also turn a previously good project into an ugly mess.

Let’s break it down.  Bond forms can be categorized in the following groups:

STATUTORY / STANDARD – required by statute or regulation such as city, state or federal forms. There are also industry standard forms such as the American Institute of Architects (AIA).

COMPANY FORMS – devised by the surety itself.

SPECIAL OBLIGEE FORMS – These are written specifically (manuscripted) to satisfy the expectations of a private obligee such as a general contractor (GC) who requires subcontractors to use them.

So how do you recognize each category and what happens next?

A STATUTORY FORM is stipulated by a public body (such as federal form 25 Performance Bond).  It will have their name pre-printed on the form and may have edition numbers or other ID showing it is theirs.  If you bond a federal contract, you MUST use this – no option.  STANDARD FORMS are used when the bonding requirements say an AIA bond form must be issued.  These are reasonably fair to all parties and are well accepted by all parties involved.

COMPANY FORMS are written in a manner the surety prefers.  These are the underwriter’s first choice and may be accepted by the obligee (party requiring the bond) if no mandatory bond form was indicated. Spot these by their ID numbers or copyright info.  The surety’s name will be pre-printed on the form.

SPECIAL OBLIGEE FORMS – may look different than normal.  Sometimes they are extremely short.  Less is not more in bond forms.  Generally, short forms omit the “rules of the road” that determine what should happen when trouble occurs, how a claim is made, what remedies are available, etc. These forms can be troublesome.  With perfectly good, tried and proven bond forms available such as AIA, why would a GC spend time and money to invent a new one? Assume such special forms are more beneficial to the GC and less fair for the subcontractor (called the Principal) and the Surety. Sometimes these forms are practically normal.  But most often we find they place unique burdens on the Principal and Surety.

Since the GC is a contractor, in the event of a default, they may just want to step in, finish the subcontractors work (not worrying about the cost) and then hand the bill to the surety.  This would be evident when reading the bond form.  The surety will consider this a forfeiture bond or financial guarantee because they were deprived of the opportunity to arrange for the economical completion of the work. Such bond forms can prevent the surety from supporting the project, no matter how confident they are in the contractor.

Summary: Contractors and their bond agents cannot ignore the bond forms.  The contractor may only be concerned about signing the contract.  But experienced bond agents and underwriters will always evaluate the forms.  If the surety throws up a red flag, the contractor should be equally concerned.  Problems caused by a bad bond form may start with the surety, but they end up on the shoulders of the contractor.

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