Secrets of Bonding 110: Contract Additions – The Downside
Generally, more is better.
“Do you want more ice cream?”
“Congratulations on your raise!”
“Honey, we are pregnant!”
The same is the case with construction contracts. It is not uncommon for the scope of work to change. The project engineer may have discovered a problem and will pay the contractor to fix it.
There could be a desire to expand or improve the project, resulting in an increase in the contract price. These additions happen routinely, and sometimes there are “deductions,” that is, an amendment that reduces the amount of the contract.
Additions to the contract mean more revenue for the contractor; it’s a good thing, unless unexpected problems arise.
In this discussion, we are talking specifically about bonded contracts. Whether public or private, principal or outsourced, our comments in this document apply.
Bonus amount vs. contract amount
The bonds, performance bonds and payment bonds in contracts are all similar, but they can have important variations. It is common for the bonus to be adjusted upward to follow an addition in the contract amount. This means that if the $ 1,000,000 contract is increased by amendment to $ 1,200,000, the bond is increased to maintain 100% coverage.
Not only does the link 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 bond is required to accept the additional exposure, they are entitled to be paid for it.
The downside of contractual additions
What could go wrong to spoil this perfect image? You have a contract and “Poof!” It just got bigger! You provided bail and “Whoosh!” Automatically adjusted to the new amount! Everything is fine!
A problem that can occur has to do with the additional premium of the bond. The subject is sometimes complicated, but the short version is that the bond will charge for the increase. If the contractor does not include the additional bond fee in the amendment negotiation, the bond fee will come from his earnings rather than pass it on to the project owner as normal.
A second problem may arise in connection with the automatic increase of the bonus. Sometimes it doesn’t happen. Some bond forms state that contract increases in excess of a set percentage (for example, 20%) must be pre-approved by the bond. This is to prevent the bond from being added to a contract amount well above the original support level. If the bond refuses to accept the increase, the contractor will have the difficult / unpleasant task of seeking a new bond and possibly paying the project bond twice. There is nothing uglier than that …
Regarding the bond rate, some bonds require payment when the contract is increased. The thought is: “We have the exhibition now, why don’t they pay us?”
Other companies can wait until the contract Advanced Payment Bond ends and settle the additions and deductions, then charge for the net increase over the original bond amount.
You may also find companies that charge for increases, but do not compensate or give refunds for deductions from the contract.
If you want to know what to expect in these situations, you should request written answers from the surety. Usually these details are not set out in writing in advance, but they are worth knowing. With contract additions, it is what you do not know that can harm you.
Steve Golia is an experienced provider of bidding and compliance bonds for contractors. For more than 30 years he has specialized in solving bail bond problems for contractors and helping them when others failed.