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The consequences of excluding the Contractor's Lien Bond from Construction Agreements (May 9, 2023)

Various agreements employed in the global construction industry are Lumpsum Contracts, Unit Price Contracts, Cost plus a fee Contracts, GMP(Guaranteed Maximum Price), and Negotiated Contracts. Most agreement types have their perks only for General Contractors. However, on the Subcontractors’ side, the scenario might vary depending on the agreement type with the General Contractor. The General Contractor usually demands contract surety bonds from the prosperous subcontractors. Contract surety bonds are as follows: bid bond, payment bond, and performance bond.

In case of a dispute in the construction phase, the performance bond is the most beneficial bond for general contractors. Conversely, subcontractors, by accepting the clauses in the performance bond, position themselves in a weaker condition. A lien bond is vital to protect the subcontractors' rights. In the event of delayed or dismissed payments, the subcontractors shall lawfully have the right to claim their certificate of payment for the work delivered to get paid. Therefore, the case phases through a better dispute resolution in the subcontractors' favor.

Force majeure should also be taken into account.

  • What is going to happen if an earthquake hits during construction?

  • What is going to happen in case of a major fire during the construction phase?

  • Did anyone consider these risk factors? Are these factors included in the risk register?

  • Who is the responsible party?

Which stakeholders are Responsible?

Which of them is Accountable?

Whom do you Consult?

and Who is Informed? (RACI)

What is the role of PMO under the circumstances?

Imagine a spark during metal welding caused a fire on a job site. The incident was reported as a technical failure by the General Contractors' technical personnel. The subcontractor is immediately called to repair the damages although they had no fault.

  • What should be the subcontractor’s approach?

  • Immediate damage repair action?

I would suggest you apply your political and strategic skills and stop the work until an addendum is signed between the parties. Would you consider a verbal promise as a legal and/or valid bond, or would you put your pen to paper?

The disputes are always open to discussion, but when it comes to reality, a written agreement before the work commencement saves both parties.

My two cents…

originally published on May 9, 2023

Kindest regards,

Ari Zingillioglu

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