The Builders Counsel: A Construction Law Blog from Washington Construction Lawyer & LEED AP Douglas S. Reiser

Provide security on your green building project with a bond

This is the second guest article provided by SuretyBonds.com, an agency that issues surety bonds nationwide. Todays post comes from Kristen Bradley, a principal at SuretyBonds.com. The first article provided information about construction bonds in Washington. This article will focus on the role surety bonds play in the ever-increasing green building market.

Professionals throughout the construction industry continue to express growing concern about the role surety bonds play in green law and how that role could change in the near future. More specific concerns consider what exactly a green bond is, how it works, and how—logistically—it could be legally enforced within the industry.

Reviewing surety bonds in construction

Basic construction bonds act as key risk-mitigation tools that are used on nearly all public construction projects. When secured for a project, a construction bond ensures a contractor will perform all duties according to the contract. If he fails to do so, the project’s developers and/or taxpayers can demand compensation from the bond’s legal, financial guarantee.

There are three key players involved in the bonding process.

1. The principal: the contractor or construction company who gets the bond to guarantee that he will follow the contract and meet all legal requirements. For example, to meet general contractor licensing requirements, contractors must purchase a contractorlicense bond. Registering as a general contractor requires a $12,000 bond while registering as specialty contractor requires a $6,000 bond.
2. The obligee: usually a government entity who requires the bond to ensure the principal will follow all necessary regulations while working on a project.
3. The surety: the insurance company or surety bond agency who issues the bond to the principal, thus holding the entity accountable for fulfilling the contract. If the principal fails to perform as promised and cannot pay the necessary compensation, the surety will be responsible for reimbursement up to the bond’s full amount.

Since most contractors would obviously like to avoid a situation in which they have to pay reparation, the bond works to prevent potential problems in the future, unlike insurance policies that typically assume a claim will be made at some point. Furthermore, sureties aim to avoid such payments, encouraging them to issue bonds only to reliable, stable clients.

Green law and surety bonds

Working with projects associated with green building stipulations can make many surety providers uncomfortable. Some contracts require a contractor to be environmentally responsible while working on the project by making efforts to increase water efficiency or decrease carbon dioxide emissions. Usually this means that certification from a third party, like the U.S. Green Building Council, is necessary. This makes the bonding process much more complex, encouraging surety providers to refrain from bonding contractors working under energy-efficient requirements or any type of third-party certification.

Since green bonds would work the same way as other bonds, the surety would be financially responsible should the contractor fail to perform appropriately. There is still some gray area about how liable a surety can be if a contractor fails to meet necessary energy efficiency requirements — if, for example, carbon dioxide emissions aren’t eliminated to the required level. This only gives another reason for surety bond providers to avoid bonding projects that expect specific environmental requirements to be met. And yet the idea of utilizing surety bonds to regulate green construction continues to linger.

Confusion surrounding the 2006 Green Building Act

The Green Building Act passed to regulate construction in Washington D.C. raised some major concerns about the the role of surety bonds in green construction. Among the new regulations included a green building requirement for certain private and public projects that mandates the use of a bond that didn’t technically exist: a green performance bond.

Surety providers sternly lobbied against the new unclear regulations, which were set to go into full effect for the D.C. area in 2012. In 2010 an important revision was made to the law’s language, changing “performance bond” to “bond.” While the change in language pleased contractors and surety providers alike, confusion still lingers about exactly what kind of bond will have to be issued and what the exact terms will be.

This case shows exactly how confusing the bonding process can be for the construction industry when green law is involved. The crux of the problem here is nobody really wants to take responsibility when green law regulations fail to be met. Once all the legal accountability has been cleared up, the use of surety bonds can help make enforcing green law more proactive rather than reactive.