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Contractors: Do you know what's in your surety bond?

Most contractors are familiar with the phrase "measure twice, cut once." Put another way, be sure of what you're doing before you do it. This holds true for signing a surety bond, the contract that guarantees you'll complete a construction job as promised, and holds both you and a surety liable if you fail to do so.

Contractors in Florida are typically named in these third-party agreements (the other parties being the owner and surety) when the scale of a project is large and/or involves public funds. Surety bonds can apply to the bid, performance of the job, or payment of subcontractors.

To lower your liability risk, you need to understand what you're signing. Here are some pitfalls to avoid in your next surety bond:

1. "Hair triggers" of liability: Surety bonds stipulate that if the contractor breaches the contract, the surety is held liable. Usually this applies to contractor defaults or other major breaches. But some bonds may state that "any breach" renders the surety responsible, even for the most miniscule variations in the construction contract. "Any breach" language raises the financial risk for both the contractor and the surety.

2. Automatic increases in surety liability: Penal sums of performance bonds are commonly set at the same monetary amount as the construction contract price. In other words, the amount of money for which the surety and/or contractor is liable usually doesn't extend beyond the price of the job. But some surety bonds stipulate that each change order will increase the penal sum. It's important for both the contractor and surety to know that the penal sum could increase beyond their initial obligation.

3. Significant extensions of liability: Most surety bonds have term limits -- that is, a limit to the length of time that the surety and contractor can be held liable for breaches of the contract. Two years within a contractor's default or a surety's refusal to perform its bond obligation is fairly common. Beware of surety bonds that expand the time limit of your obligation or the surety's, such as language that extends to the expiration of warranties. If you're held liable until the roofing material warranty expires, for example, that could be a commitment of 20 years.

A surety bond isn't always an easy read, of course. This is why many contractors opt to work with an attorney to ensure the contract is fair and reasonable. Such legal assistance enables you to focus on the contract itself and the work that lies ahead.

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