Secrets of Bonding #110: Contract Additions – Is More Always Better?

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USUALLY more is better. 

  • “Would you like more ice cream?”
  • “Congratulations on your raise!”
  • “Honey, we’re pregnant!”more2

The same is true when it comes to construction contracts.  It is not uncommon for the scope of work to be modified. The project engineer may have discovered a problem and they will pay the contractor to fix it.

There could be a desire to expand or enhance the project, resulting in an increased contract price.  These additions occur routinely. Sometimes there are also “deducts” meaning an amendment that reduces the contract amount.

Additions to the contract mean more revenues for the contractor – it’s a good thing, unless unexpected problems pop up.

In this discussion, we are talking specifically about bonded contracts.  Whether public or private, prime or subcontract, our comments herein apply.

more3Bond Amount vs. Contract Amount

Surety bonds, Performance and Payment Bonds on contracts, are all similar but may have important variations.  It is common for the bond to adjust upward to follow an addition in the contract amount.  This means if the $1,000,000 contract is increased by amendment to $1,200,000, the bond is increased so that 100% coverage is maintained.

Not only does the bond increase, the adjustment is usually automatic.  Most bonds say there is an automatic increase with no obligation to inform the surety of the change.

When the surety is required to accept the additional exposure, they are entitled to be paid for it.

The Downside of Contract Additions

What could possibly go wrong to spoil this perfect picture? You have a contract and Poof!” it just got bigger!  You provided a surety bond and “Wham!” it automatically adjusted to the new amount!  All good!

  1. One problem that can occur involves the additional bond premium. The subject is sometimes complicated, but the short version is that the surety will charge for the increase.  If the contractor fails to include the additional bond fee in the negotiation for the amendment, the bond fee will come out of their profits instead of being passed on to the project owner as is normal.
  2. A second issue can arise in connection with the automatic bond increase. Sometimes it doesn’t happen.  Some bond forms state that contract increases in excess of a stated percentage (e.g. 20%) must be pre-approved by the surety.  This is to prevent the surety from being pulled into a contract amount far above the original support level. If the surety refuses to accept the increase, the contractor will have the difficult / unpleasant task of seeking a new surety and possibly paying twice to bond the project!  Doesn’t get much uglier than that…

Subtletiesmore1

On the subject of the bond fee, some sureties demand payment when the contract increase occurs.  The thinking is, “We have the exposure now, why not get paid?”

Other companies may wait until the contract ends and net out additions and deducts, then charge for the net increase over the original bond amount.

You may also run into companies that charge for increases, but do not net out or give refunds for contract deductions.

If you want to know what to expect in these situations, you must ask for written answers from the surety.  These fine points are usually not stated in writing in advance – but are worth knowing.  With contract additions, it’s what you don’t know that can hurt you.

The experts at Bonding Pros can help Insurance Agents and Contractors when tough bonding situations arise. We have the markets and the know-how to succeed even when others have failed.

Give us a call today!  856-304-7348

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