ConsensusDocs' New Bond Forms Featured as Part of the ‘Construction Contract Document Toolkit’

More than 700 conference attendees gathered at a recent American Bar Association (ABA) Fidelity and Surety Law annual meeting to share insights and information on the "Construction Document Toolkit: The Documents Behind the Decisions.”  ConsensusDocs’ Executive Director Brian Perlberg and Adam Tuckman, a construction and surety law attorney at Watt Tieder LLP, gave an overview of ConsensusDocs and some of the key differences with the American Institute of Architects (AIA) A201. ConsensusDocs’ recently updated performance and payment bonds also were featured prominently at the plenary educational session.

Of particular interest to the audience were the ConsensusDocs performance and payment bonds. The ConsensusDocs 706 Subcontract Performance bond is the only standard bond form that provides a self-help provision. A self-help provision gives a General Contractor a means to mitigate potential damages during a surety’s investigation period. Sureties typically have exclusive control of remedial actions during this period. However, as customers of bonds, savvy general contractors embrace this option. Representatives from general contractors who led efforts in the drafting process for ConsensusDocs insisted upon a self-help option. Now that the bonds are published, other general contractors are embracing this option and are moving toward the new ConsensusDocs bonds. Groups like the Surety and Fidelity Association of America (SFAA) and the National Association of Bond Producers (NASBP) are part of the ConsensusDocs Coalition.

Mr. Perlberg explained that the self-help provision is not a blank check to spend freely to back-charge Subcontractors in the name of mitigation. Instead, it would be wise to segment remedial costs attributable to self-help versus other construction work and keep a detailed accounting of such self-help costs to ensure they are justified. Otherwise, such costs might be challenged later.

The session also explained how providing clear timeframes and actions by both a surety and general contractor are important for success in navigating potential bond claims. In the previous edition, of the ConsensusDocs 706, the General Contractor only had to declare a default. Now a termination is required to trigger deadlines from the surety. The surety has an agreed-upon number of days to complete its investigation. If not specified, the default is 30 calendar days. Then the surety must do one of four things:

  1. Complete the work through the existing Subcontractor with consent of the Constructor;
  2. Enter into a takeover agreement to complete the work;
  3. Arrange for completion (tender); or
  4. Waive its rights to complete and reimburse the General Contractor for its reasonable costs, not to exceed the Bond Sum.

Another element in the revised ConsensusDocs bond forms is an automatic increase of the penal sum up to an agreed-upon percentage. This means that additive change orders will increase the penal sum. Mr. Perlberg noted that additive change orders already cause bond premiums to increase. Significantly, the parties select a ceiling for which the bond can increase. The default permissible percentage increase is 25 percent. Once the ceiling is reached, the surety must approve any additional increases before the penal sum changes. This affords sureties an opportunity to perform a new underwriting analysis to determine if such increases are permissible.

Project Financial Information

The conference also covered the importance to receive project financial information. The AIA A201 does provide an ability to request such information but upon construction commencing that ability is qualified. The ConsensusDocs language was credited as providing stronger and more straightforward. In addition, ConsensusDocs publishes 290.1 Owner Financial Questionnaire which provides model questions to reasonably request such information.

Additional Resources

ConsensusDocs Performance and Payment Bond Resource Center is here.

AGC Surety Bond webpage is here.

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