New Proposed Surety Bond Requirements on Ohio Public Projects
Ohio’s reform of its public contracting laws this past summer included provisions that will affect the occasions for and requirements for surety bonds. Although the statute itself sets forth some of the new requirements, new administrative rules are being considered that will have an important impact on contractors who enter CM at Risk contracts and Design-Build contracts on most public projects.
General financial security provisions for the various project delivery methods are set forth in the statute:
- Traditional 5-Prime Contracting and Single Prime Lump Sum General Contracting (no change):
o Letter of credit;
o Surety bond; or
o Certified check or cashier’s check equal to the amount of the contract.
- Construction Management Contracts (i.e., agency CM, or CM-advisor):
o Letter of credit;
o Surety bond;
o Certified check or cashier’s check equal to the amount of the contract; or
o Other security that provides reasonable financial assurance of a nature and in an amount satisfactory to the public authority.
- Construction Manager at Risk Contracts:
o Surety bond, in accordance with administrative rules to be adopted.
- Design-Build Contracts:
o Surety bond, in accordance with administrative rules to be adopted.
Rules have been proposed and a hearing was conducted on November 14 to consider, among other things, the surety bond requirements for CM at Risk and Design-Build contracts. The proposed rules, if adopted, would require the following:
- The penal sum of the bond must be 100% of the contract sum.
- If the contract sum increases, the contractor must procure an increase in the penal sum of equal amount.
- If the contractor fails to procure the increase, the public authority would not be obligated to pay for any of the work associated with the increase.
- If the surety is adjudged bankrupt, or has other similar financial problems, the contractor must procure a replacement bond within 21 days.
- The contractor must submit separate performance and payment bonds in the forms required by the State Architect’s office.
The requirement to increase the bond amount, although sometimes required by contract, would be new to Ohio law. If adopted, it would become a standard additional administrative burden on contractors doing public projects. Moreover, it would raise questions as to when a contractor must seek an increase in the bond amount where the public authority and the contractor are not in agreement. Must the contractor procure an increase when it requests, but is denied, an increase in the contract sum or risk losing its right to the extra payment? Will a surety necessarily agree to a requested increase on a troubled project? These proposed rules clearly need more thought.
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