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Construction Payment and Performance Bond Fundamentals

Learn costs and defenses, along with the differences and protections provided by payment bonds, performance bonds and contractor default insurance.

Learn costs and defenses, along with the differences and protections provided by payment bonds, performance bonds and contractor default insurance. Many project owners face uncertainty and financial loss due to the nonperformance or financial default of a contractor. Historically, owners have protected themselves from this potential by having contractors post performance bonds and/or payment bonds. Typically, where these bonds are provided, coverage is obtained under both a payment bond and a performance bond. A performance bond is issued by a surety to guarantee satisfactory completion of a project in the event of nonperformance or default by a contractor. A payment bond guarantees payment to the subcontractors and material suppliers for the labor and material supplied to a project. Recently, project owners have also used contractor default insurance as a potential replacement or substitute for a payment bond or a performance bond. Contractor default insurance provides indemnification to the project owner for the direct and indirect costs incurred as the result of subcontractor default. This topic helps project owners understand the differences and protections provided by payment bonds, performance bonds and contractor default insurance; the potential coverage provided by each; costs of payment and performance bond premiums and how to trigger coverage under each. Identify the potential defenses available to coverage under a payment bond, performance bond and contractor default insurance. In addition, a discussion of the potential of obtaining subcontractor default insurance or Sub Guard and the differences and potential benefits of Sub Guard versus construction bonds.

Runtime: 78 minutes
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Over 32 years and 1.4 million customers worth of experience providing continuing education. Our passion is providing you world-class training to help you succeed in business and as a professional.

Agenda

Purpose and Benefit of a Construction Payment Bond

  • A Construction Payment Bond and a Construction Performance Bond Are Typically Obtained Together for a Construction Project
  • Obtained by the General Contractor for the Benefit of the Owner but Costs Typically Passed Through to Owner
  • A Payment Bond Guarantees Payment to the Subcontractors and Material Suppliers for the Labor and Material Supplied to a Project
  • Shields a Project Owner From Liability for Claims by Subcontractors or Material Suppliers
  • Bond Amount Is Typically Less Than the Full Contract Price Because the Bond Is Only Designed to Cover Subcontractor and Material Costs
  • All Construction Contracts Issued by the Federal Government Must Be Backed by Performance and Payment Bonds

Purpose and Benefit of a Performance Bond

  • Performance Bonds Are Issued by a Surety to Guarantee Satisfactory Completion of a Project in the Event of Nonperformance or Default by the Contractor
  • Obtained by the General Contractor for the Benefit of the Owner but Costs Typically Passed Through to Owner
  • If the Contractor Fails to Construct the Building According to the Plan and Specifications or Becomes Insolvent or Declares Bankruptcy, the Project Owner Client Is Guaranteed Compensation for Any Monetary Loss up to the Amount of the Performance Bond
  • Performance Bond Premiums Are Based on the Project Amount and the Financial Ability of the Contractor
  • Surety Options: Complete the Contract Through a Completion Contractor, Select a New the Contractor to Contract Directly With the Owner, or Allow the Owner to Complete the Work With the Surety Paying the Costs
  • In Order to Trigger Coverage Under a Performance Bond, the Project Owner Must Comply With the Bond's Provisions and Demonstrate Default of Nonperformance by the Contractor
  • Potential Defenses by a Surety to Coverage Under a Performance Bond

Subcontractor Default Insurance or Sub Guard - a Potential Alternative to a Construction Bond

  • Differences Between Sub Guard and Construction Bonds
  • Provides Indemnification to the Project Owner for the Direct and Indirect Costs Incurred as a Result of Subcontractor Default
  • The Determination of Subcontractor Default Is Made by the General Contractor
  • Options Available to the General Contractor in the Event of Contractor Default
  • Cost of Contractor Default Insurance
  • Contractor Default Insurance - Similar to Subguard With a Few Differences
  • Other Products/Solutions to Subcontractor Default
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Why Lorman?

Over 32 years and 1.4 million customers worth of experience providing continuing education. Our passion is providing you world-class training to help you succeed in business and as a professional.

Credits

OnDemand Webinar

This course was last revised on November 1, 2016.

Call 1-866-352-9540 for further credit information.

This program does NOT qualify, nor meet the National Standard for NASBA accreditation.

Audio & Reference Manual

  • Arizona CLE 1.5
     
  • CA MCLE 1.5
     
  • CT CLE 1.5
     
  • HI CLE 1.5
     
  • IL CLE 1.5
     
  • ME CLE 1.5
     
  • MT CLE 1.5
     
  • NJ CLE 1.8
     
  • NV CLE 1.5
     
  • VT CLE 1.5
     
  • WA CLE 1.5
     
  • WV MCLE 1.8
     
The CLE Code is ONLY a requirement when applying for CLE Credit in California (for participatory credit), Kansas, New Jersey or New York. Other states do not need to supply the CLE Code to apply for CLE credit.

This program does NOT qualify, nor meet the National Standard for NASBA accreditation.

MP3 Download

  • Arizona CLE 1.5
     
  • CA MCLE 1.5
     
  • CT CLE 1.5
     
  • HI CLE 1.5
     
  • IL CLE 1.5
     
  • ME CLE 1.5
     
  • MT CLE 1.5
     
  • NJ CLE 1.8
     
  • NV CLE 1.5
     
  • VT CLE 1.5
     
  • WA CLE 1.5
     
  • WV MCLE 1.8
     
The CLE Code is ONLY a requirement when applying for CLE Credit in California (for participatory credit), Kansas, New Jersey or New York. Other states do not need to supply the CLE Code to apply for CLE credit.

This program does NOT qualify, nor meet the National Standard for NASBA accreditation.

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Why Lorman?

Over 32 years and 1.4 million customers worth of experience providing continuing education. Our passion is providing you world-class training to help you succeed in business and as a professional.

Faculty

Mark D. Johnson

Mark D. Johnson

Snell & Wilmer L.L.P.

  • Partner in the Los Angeles office of Snell & Wilmer L.L.P.
  • Has lead chair experience in more than 20 jury trials, bench trials and arbitrations involving a variety of construction, environmental, land use, real estate and toxic tort issues
  • Regularly conducts seminars, speaks and publishes articles on a variety of construction topics including alternative dispute resolution, damages, delay, surety bond claims and insurance coverage
  • Wrote a chapter entitled “Effective Dispute Resolution Provisions And Strategies To Resolve Construction Disputes During And After The Project,” in “Construction Dispute Resolution”, Aspatore Press, 2013
  • Prior to becoming a lawyer worked as an engineer in the oil industry
  • Member of the American Arbitration Association National Roster of Neutrals
  • J.D. degree, Loyola Law School; B.S. degree in petroleum engineering, University of Southern California
  • Can be contacted at 213-929-2532, [email protected], or https://www.linkedin.com/in/markdjohnsontriallaw
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Product ID: 399427
Published 2016, 2019
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