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Our office had a construction contractor (I'll call them "Acme") fail to perform, so we did a termination for default. They had bonds issued from a bonding company (I'll call them "Bondo"). We then attempted to get Bondo to get the work completed. Bondo started discussing with us and then when they discovered that the amount was around $800k, they simply refused to communicate further.

Our agency's attorney spoke with a DOJ attorney who advised that the only costs we would be able to recover are reprocurement costs, which will probably only be a few thousand dollars. The DOJ attorney said that Bondo probably did an analysis and decided it would be cheaper for them to not perform and only pay reprocurement costs than it would be for them to complete the work.

There are more details (including the Government paying Acme for work not completed), but I don't want to make this question longer than it already is.

My question is this. What good is the performance bond if the surety can simply decline to perform? The Government pays for these bonds (as the contractors roll that cost into their bid) and from this experience it seems like a waste of money.

I've never had a bonding company do this so this is new territory for me. Is there a step we may be missing? If not, I think I need to go into the bonding business. Seems like a very low-risk business if all they can hit me up for is reprocurement costs!

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To add to my confusion was the following statement (emphasis added) in "1-A CONSTRUCTION & FIRE, LLP, Appellant, v. DEPARTMENT OF AGRICULTURE, Respondent":

In its briefing, the Government has detailed the manner in which it attempted to have 1-A Construction's surety, Lexon Surety Group (Lexon), take over this contract following the default termination. It has also detailed how, after Lexon declined to complete the contract, it was forced to reprocure a new contractor to complete the necessary work and that the USFS incurred significant costs through substantial completion of the job on October 27, 2012 -- 365 days after 1-A Construction was supposed to have completed the contract work.

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I think everyone has learned that the Government is a patsy when it comes to bonds.

You asked, What good is the performance bond if the surety can simply decline to perform?

I'll re-phrase your question as, What good is the performance bond if the Government won't demand that the surety honor it?

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Our office had a construction contractor (I'll call them "Acme") fail to perform, so we did a termination for default. They had bonds issued from a bonding company (I'll call them "Bondo"). We then attempted to get Bondo to get the work completed. Bondo started discussing with us and then when they discovered that the amount was around $800k, they simply refused to communicate further.

Our agency's attorney spoke with a DOJ attorney who advised that the only costs we would be able to recover are reprocurement costs, which will probably only be a few thousand dollars. The DOJ attorney said that Bondo probably did an analysis and decided it would be cheaper for them to not perform and only pay reprocurement costs than it would be for them to complete the work.

There are more details (including the Government paying Acme for work not completed), but I don't want to make this question longer than it already is.

My question is this. What good is the performance bond if the surety can simply decline to perform? The Government pays for these bonds (as the contractors roll that cost into their bid) and from this experience it seems like a waste of money.

I've never had a bonding company do this so this is new territory for me. Is there a step we may be missing? If not, I think I need to go into the bonding business. Seems like a very low-risk business if all they can hit me up for is reprocurement costs!

the Devil is in the details, as they say. If you overpaid the contractor, you may have given the bonding company a big "out". You didn't provide any details of the overall scenario. Depends upon the facts of the situation

I have had satisfactory results dealing with bonding companies and defaults, although it takes a lot of patience and determination. In one situation the bonding company did not want to complete the project but agreed to a "Tender and Release Agreement ", wherein they offered a completion contractor under a separate bonding company with a new completion date. We accepted but required them to bring a check for the LDs with them to our office to sign the Agreement. LDs were more than $400k. In another instance we allowed a sub to complete the job and collected $5 million in LDs up front.

I have been involved with numerous Takeover Agreements with Bonding Companies that were used to complete defaulted contracts with the original or other contractor or even the bonding company's hired management consultants managing the subs.

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To add to my confusion was the following statement (emphasis added) in "1-A CONSTRUCTION & FIRE, LLP, Appellant, v. DEPARTMENT OF AGRICULTURE, Respondent":

In its briefing, the Government has detailed the manner in which it attempted to have 1-A Construction's surety, Lexon Surety Group (Lexon), take over this contract following the default termination. It has also detailed how, after Lexon declined to complete the contract, it was forced to reprocure a new contractor to complete the necessary work and that the USFS incurred significant costs through substantial completion of the job on October 27, 2012 -- 365 days after 1-A Construction was supposed to have completed the contract work.

What is your point? I Am driving and on a cell phone today so can't take time to read the decision you refer to. What was the outcome?

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You can have a perfect legal case and lose it based upon lousy or incompetent legal representation by your attorney or by Department of Justice (DOJ). In your case, I'd bet that DOJ doesn't want to fool with it for a small amount and/or the government is not clean. If the government overpaid the contractor, it probably injured the bonding company's interests. When the parties execute a Takeover Agreement, the bonding company normally uses the remaining contract funds, less any liquidated damages assessed, to complete the work. The government has been found liable to the bonding company in instances where the government overpaid the defaulting contractor, thus denying the bonding company funds necessary to finish the work.

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Desparado, What is your question concerning 1-A Construction & Fire LLP v sept of Agriculture at http://www.cbca.gsa.gov/files/decisions/2015/LESTER_03-17-15_2693__1-A_CONSTRUCTION_%26_FIRE,_LLP.pdf

The Board said it had no jurisdiction over the Government's request for excess reprocurement costs because the KO never issued a KO Decision demanding payment of those costs to establish a government claim with a contractor right to appeal pursuant to the CDA. It didn't deny the government's right to recover those costs.

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Joel,

Thank you for the info you provided. It helped me in my understanding. My issue with 1-A Construction is simply where the surety "declined to complete the contract". Isn't that one of the main reasons to get a performance bond?

Yes, the Government injured itself by paying the contractor for work not completed, and we are pursuing that with the contractor. I did not realize that affected the situation with the surety as the work contracted for was not performed. Your explanation of the fact that typically the unused funds are used for the surety to complete the work helped me. Thanks. Still doesn't explain why in the 1-A case the surety can simply decline.

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Desparado, we don't know why they declined from reading the case. The Board simply said they didn't have any jurisdiction in that instance because there was no claim concerning that matter . I suppose that a surety could always decline to fulfill its duties. Then the Government needs to evaluate and decide what to do. Depends upon the circumstances. The lawyers need to advise you how to protect the governments interests in the event that you have to get the work done and keep the contractor and surety liable for the extra expenses.

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Desparado,

While trying to initiate a Miller Act claim, my company had the recent "pleasure" of finding out that the surety had filed for bankruptcy! To make matters worse, the surety turned out to be an individual and the agency had failed to verify the surety's assets were secured before accepting the bonds.

Talk about an unpleasant surprise!

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Desparado,

While trying to initiate a Miller Act claim, my company had the recent "pleasure" of finding out that the surety had filed for bankruptcy! To make matters worse, the surety turned out to be an individual and the agency had failed to verify the surety's assets were secured before accepting the bonds.

Talk about an unpleasant surprise!

Shauna, please tell me the agency wasn't the USACE. Our lawyers were very deliberate in checking individual sureties. Very few, if any, passed muster.
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Joel, unfortunately it was. I won't name the specific ENDIST, however, because I'm sure they will (if they haven't already) be catching grief from way up the "food chain" because the individual surety has been involved with multiple lawsuits (including one brought by the Army) and was even referenced in a Congressional report.

Following is a link to a Engineering News-Record article that gives a good summary about the individual: http://enr.construction.com/business_management/finance/2014/0805-outspoken-individual-surety-files-for-bankruptcy-protection.asp

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Shauna, I'm sorry and disappointed that one of my former organizations approved this individual surety for your contract. At least one other frequent poster here is familiar with one of the long time attorneys in that office. However, in reading the article, it appears that the Owner of the I.S. was fairly litigious and had previously sued the Army. It is difficult to know with certainty from the information in the article whether the Army was negligent in approving the I.S.

I did notice one thing. The article states: "Except for a felony involving worthless checks committed when he was in his 20s, Scarborough has not been charged or convicted of any financial crime." Later, it says that the Scarboroughs property included an extensive firearms collection." I thought that convicted felons are prohibited from owning or possessing firearms...

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