In the construction industry, disputes, delays, and payment issues can quickly escalate into bond claims if they are not handled carefully. Understanding how surety claims work and how contractors can protect themselves is critical for avoiding costly mistakes and preserving business relationships.
We recently spoke with a surety claims attorney about her thoughts on common contractor pitfalls and ways to minimize costly fights. Much of this information may seem straightforward, but it is often overlooked when projects become busy or stressful. Here are several key takeaways every contractor should keep in mind.
Pause and Get Advice Before Walking Off a Job
One of the most important pieces of advice for contractors facing a payment dispute or conflict on a project is simple: do not make emotional decisions.
If a contractor is considering walking off a job, the first step should be to consult an attorney and involve the surety claims representative early in the conversation. Surety claims professionals deal with dispute resolution regularly and can often provide valuable insight into contractual obligations and potential consequences. While the Surety claims professionals won’t replace the advice of your own attorney, they can provide insight on the issue from the surety’s perspective.
Also, a critical point contractors sometimes overlook is that nonpayment is not automatically considered a breach in every state. Walking off a project prematurely can sometimes create bigger legal and financial problems than the original dispute itself.
Early communication and professional guidance can help preserve options before positions harden.
The Role of the Surety and Balancing Multiple Obligations
A common misconception is that the surety’s sole responsibility is to protect the contractor. In reality, the relationship is more nuanced. While many consider the contractor to be the surety’s customer, but the bond itself exists for the benefit of the obligee, which is the owner or entity requiring the bond. Because of this, claims attorneys must evaluate all sides of a dispute objectively.
While the surety underwriter focuses on evaluating and supporting the contractor during the bonding process, the surety claims attorney approaches situations differently. Their responsibility is to ensure that the obligations of the bond are honored. That means investigating the positions of the contractor (principal), obligee, claimant, and indemnitors before determining how the claim should be handled. Claims investigations are ultimately about weighing facts, contract terms, documentation, and obligations fairly.
Best Ways for Contractors to Mitigate Risk
Strong project management starts long before a dispute arises. Contractors can significantly reduce risk exposure by focusing on a few foundational practices that seem obvious but are easy to take for granted:
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Read and fully understand the contract.
Some contractors do not bother to read their contracts on public projects or negotiate better terms on private projects or subcontracts. Even if you cannot get changes made, knowing your responsibilities can help you avoid bad situations in the first place. -
Carefully review bond forms and obligations.
Not all bond forms are the same. For example, some limit the surety's options or require them to respond to a claim in unrealistic timeframes, which creates more risk for the surety and therefore the contractor.
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Understand the project’s change order procedures.
A common example is the gross profit allowed on change orders. If a contract only allows for a small markup on change orders, you want to know that ahead of time to evaluate the potential for a lot of unforeseen changes. -
Review dispute resolution language before work begins.
The claims attorney we spoke with also emphasized the importance of involving legal counsel early, even if only for a consultation. Early intervention often prevents minor disagreements from becoming major claims.
Documentation Can Make or Break a Claim
If there was one point emphasized repeatedly, it was this: Document everything. Strong documentation is often the deciding factor in disputes and claims investigations, but human nature is to not want to take the time or feel like you are escalating a situation.
Contractors should follow verbal conversations with written emails, maintain organized project records, and preserve detailed communication logs throughout the life of the project. As our claims attorney put it, “The person with the better documentation usually wins.”
Assembling Your Advisory Team
In difficult scenarios, having the right partners makes a significant difference. Initially, the surety agent plays a big role in facilitating communication with the contractor and setting expectations. The agent is often the conduit to help explain what is going on with claims.
It is also highly beneficial to have a construction oriented attorney who understands surety. The surety and the principal might have very different allowed defenses. If your attorney does not understand this, they might miss opportunities for a better outcome, because a defense for the surety is typically better for the principal as well.
Final Thoughts on Proactive Risk Management
Surety claims are rarely simple, but many problems can be minimized through preparation, communication, documentation, and early intervention. Contractors who understand their contracts, involve experienced advisors early, and maintain strong project records place themselves in a much stronger position when challenges arise. In construction, proactive risk management is often the difference between resolving a dispute and escalating a claim.
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