Amazon’s highly publicized search for an east coast home for its second headquarters, dubbed Amazon HQ2, ultimately resulted in a plan for construction on two sites in Arlington, Virginia. The project is proceeding in two phases at a total cost of more than $2.5 billion.
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Phase 1 of Amazon HQ2
Construction of two 22-story towers for Amazon HQ2 started in January 2020 on what has become known as the Metropolitan Park site—Phase 1 of the project—with completion on track for mid-2023. In addition to the two solar-powered office towers, the Amazon HQ2 site will include more than 50,000 square feet of retail space, including a daycare center, a 2-acre public park, and a meeting center available for use by the community at no cost. The buildings’ rooftops will feature a café, dog run, and urban farm terrace.
Phase 2 of Amazon HQ2
Phase 2 involves the construction of “The Helix ” on the PenPlace site, which required the FAA to sign off on the plan with a “Determination of No Hazard to Air Navigation ” due to the structure’s height and proximity to Reagan Washington National Airport. The 354-foot tall glass Helix emulating the double helix structure of human DNA (but often described as resembling a glass “poop” emoji) is intended as a space for Amazon employees to relax and interact informally with colleagues. Phase 2 is scheduled for completion in 2026.
While the Amazon HQ2 project is proceeding on schedule, construction projects of this size present numerous risks, including the risk of contractor default. While surety bonds have long been in use on public works projects as a risk mitigation strategy, their wide use for privately funded projects is relatively recent.
Contractor Bonds as a Risk Mitigation Strategy for Private Construction
With any construction project, there is a risk of contractor default or other unfortunate outcomes. With millions or even billions of dollars at stake, risk management and risk mitigation are essential. Surety bonds, referred to collectively as contractor bonds or construction bonds, provide a tried-and-true solution.
Ever since federal legislation known as the Miller Act was passed in 1932, both performance and payment bonds have been mandatory for all federal construction contracts valued at more than $100,000. At the state level, “Little Miller Acts” impose the same bonding requirement for state-funded public works projects. In recent years, owners of private construction projects have been requiring surety bonds from their contractors to protect themselves and their investors against financial loss due to contractor default.
Among the most common causes of contractor default are underbidding a project, insufficient cash flow, poor project management, inadequate or flawed planning, or taking on too many projects and overcommitting resources. Unforeseen problems, such as supply chain disruptions and sudden changes in the economic environment, may also come into play.
Private project owners who employ a risk mitigation strategy based on bonding typically require contractors to furnish bid bonds, performance bonds, and payment bonds at a minimum. These bonds transfer financial risk from the project owner to a surety, often an insurance company or an insurance company division or subsidiary.
A lot of work goes into selecting a contractor for a large contract awarded through competitive bidding. It can cost the project owner a lot of time and money when the winning bidder ultimately refuses the contract or is unable to qualify for the necessary performance bond, making it necessary to go through the bidding process again and select another contractor. A bid bond is a bidding contractor’s guarantee to provide a performance bond and accept the contract. The bond provides compensation for the project owner if the contractor fails to live up to that obligation.
Performance bonds protect the project owner financially if the contractor fails to complete the project in accordance with the applicable quality standards and contractual requirements. If the contractor defaults, the surety must remedy the situation to the satisfaction of the project owner by taking measures such as:
- Taking charge of the project in place of the defaulting contractor and perhaps finding another contractor to complete the job under the surety’s oversight
- Offering a new contractor for the project owner’s approval, without taking charge of the project and paying damages to the project owner or paying the new contractor more than the amount remaining on the contract
- Helping the original contractor avoid default and complete the project by providing technical or financial assistance
- Compensating the project owner for losses resulting from the original contractor’s default and leaving the project owner to decide how to complete the job
Payment bonds guarantee subcontractors and suppliers will be paid by the contractor according to the terms of the contract. Claims for payment can be made if the contractor is behind the payment schedule, whether or not there is a default.
Your private project need not be as large as Amazon’s HQ2 project to make construction bonding an effective risk mitigation strategy.
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