An Administrator's Guide to California Private School Law

Chapter 17 – Construction

performance bond and the contractor defaults, the school’s only remedy is usually to proceed against the contractor. If the contractor declares bankruptcy or dissolves, the school will likely lose the ability to ensure completion of the project for the agreed-upon time and price. Performance bonds are not required by law, but are advisable from a risk management perspective. Contractors may raise their proposed construction price to cover their costs to secure this bond, but schools may want to accept this increased cost to provide these assurances of project completion. The face amount of the performance bond usually matches the contract amount. Performance bonds should incorporate by reference the entire underlying contract documents. This means that the surety has agreed to guarantee every term, covenant, and condition in the contract documents, not just to guarantee the completion of the work of improvement that is the subject of the contract documents. 2345 If the performance bond guarantees only performance of the work contracted to be performed, not the contract or its covenants, then the performance of provisions other than those covering the work of the contract may be found to be outside the scope of bond coverage. 2346 B. P AYMENT B ONDS A payment bond is intended to provide assurance to the school, as project owner, that the contractor’s subcontractors and suppliers will be paid all amounts due from the contractor. A payment bond provides subcontractors and suppliers an alternative to mechanics liens or stop payment notices. If the contractor fails to properly pay those entities, they may file a claim against the surety directly without filing a mechanics lien, stop payment notice, or otherwise involving the school and its property. The surety’s financial obligations are normally limited to the payment bond’s face amount. Schools may need to provide their own payment bonds or other security if the school is the owner of a project with a contract price greater than $5,000,000. 2347 A school may be exempt from this requirement if it is a “qualified private company,” meaning its net worth is over $50,000,000 at all times during the project. 2348 For projects of that size that need a payment bond, the school may satisfy this requirement by providing a payment bond, an irrevocable letter of credit, or an escrow account. 2349 The payment bond must be in an amount of at least 15% of the contract price. 2350 If the contractor will substantially complete the project within six months, the payment bond must be in an amount of at least 25% of the contract price. 2351 Additionally, the surety insurer must be either listed in the Department of the Treasury’s Listing of Approved Sureties, or have an A.M. Best rating of A or better, and have an underwriting limitation greater

than the amount of the bond. 2352 LCW Practice Advisor

A school should consider requiring the contractor to obtain a payment bond equal to the contract amount even if the project is not over the $5,000,000 threshold. This may result in a small increase in project cost, but will provide assurance that the school is protected from subcontractor or supplier claims of nonpayment.

An Administrator’s Guide to California Private School Law ©2019 Liebert Cassidy Whitmore 573