Change orders from a general contractor created a challenging bond issue that needed a quick resolution. Old Republic Surety (ORS) was able to provide the required “yes” and coordinate seamless transfer of the risk from an existing bond to an entirely new one.
A key agent for ORS reached out to us with a tough situation. Their contractor in California was working as a sub to a large GC. The original subcontract price was $500,000 which their surety was able to easily support. However, as the project progressed, new change orders raised the contract amount – first by another $2.5 million and then by an additional $15 million. These sizable increases meant the project was now coming in at $18 million.
It was a total that exceeded the limits of the surety company that had issued the original $500,000 bond. Rather than creating a new $15 million contract for the large change order that would have a separate Performance & Payment bond, the GC insisted on keeping it as a change order to the original contract.
That left the contractor in a tough spot. How could it get a bond to cover the full $18 million when the surety that was bonding the contract didn’t have the capacity to do so?
“The contractor needed to find a new home quickly,” says Erik Mueller, ORS Contract Bond Manager. “Fortunately, we were able to step in on an already started project and get our arms around the total risk. From the time we got that first call to bond approval, we wrapped everything up in only 10 days.”
Reaching approval
Although the size of the bond wasn’t a challenge for ORS, the timeline and the transfer of liability did require careful planning. “We immediately started the process with an ‘All Rights’ letter to be signed by the obligee of the original bond, which helped us establish the facts that no claims had been made against that initial bond and that there were no existing project defects or outstanding payments due to suppliers,” explains Mueller. “Both our claims team and the claims team of the original surety worked together closely to help us move 100% of the liability to ORS and leave the other company in the clear. For the sake of the client, we wanted to protect their relationship with the obligee and keep the project moving with minimal disruption.”
With the All Rights letter in process, the ORS underwriting team was also diving into a full risk review. “This was one of the biggest jobs the contractor had ever done,” says Mueller. “The last project they’d done of comparable size was 12 to 15 years prior, so we focused on their corporate resume and relied heavily on a virtual meeting that allowed them to explain how this job matched their capabilities. Of course, we also reviewed their financials and filled in any gaps in information by talking to them directly. As we always do at ORS, getting a feel for the people working on the project is important. Working together on a tight schedule helped us understand them better. All this fact-gathering got us to a confident approval point.”
Ultimately, Mueller credits ORS flexibility for the team win. “We were always cognizant of keeping the process moving. We didn’t want to damage the contractor’s relationship with the obligee, and once we were comfortable with the people we were working with, we were ready to get the bond out the door even as we were finalizing details.”
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