Surety Bridge Fund, a component of the Surety Connection Program developed by North Coast Surety, was created to provide new tools to the surety industry and their contractor clients. Surety Bridge Fund addresses the devastating impacts of unfunded owner directed change orders that cause crippling financial burdens on contractors, impact project performance, and increase the exposures to a surety. It is a new reality that it is not the failure of contractors that give rise to defaults, it is contractors that run out of money.

For the contractor the risk of an unfunded directive is the cost prohibitive act of perfecting their claims in the legal system. If financing the work called for in unfunded directives doesn’t kill them, the legal system will. For the surety, the unfunded directive is the poison pill that cripples their client, compounds the loss. The unfunded directive adds the costs of replacement contractors and increases liability associated with delays and related impacts.

The only beneficiary of the unfunded directive is the owner in the short term and the legal profession in the long term. The legal profession’s income is derived from debating the issue for the long term rather that settling in the short term. The surety market’s financial guarantee to the construction process has developed into an inefficient system. This system depletes contractors’ financial resources, making them too weak to fight. The resulting default is turned over to a legal system.

For the surety industry to return to profitability, the unfunded directive, must have its resolution in a process that financially rewards quick resolution and retains the available project funds for the project participants. It cannot be a process that provides a profit for not resolving issues to non project participants.

The process would look something like this:

Without Surety Bridge Fund

• Unanticipated work is encountered by the contractor that is not part of the specifications, which, according to the contractor, constitutes a change order.
• The owner acknowledges that the work needs to be done, but neither accepts nor rejects the contractor’s position regarding a change order.
• The contractor submits a request for change order to the owner.
• The owner rejects the change order, but requires the work be done under a written directive to proceed, signed by both the owner and contractor.
• The owner makes no change to the contract amount and provides no funding for the work.
• The contractor performs the work under protest and accounts for the work as an under billing, or internally recognizes the extra work as an increase in contract value.
• The contract and owner work to resolve the dispute, often not until the project is completed. All the while the contractor had to finance the work internally.

With Surety Bridge Funds

• Unanticipated work is encountered by the contractor that is not part of the specifications, which, according to the contractor, constitutes a change order.
• The owner acknowledges that the work needs to be done, but neither accepts nor rejects the contractor’s position regarding a change order.
• The contractor submits a request for change order to the owner.
• The owner rejects the change order, but requires the work be done under a written directive to proceed signed by both the owner and contractor.
• The contractor applies to Surety Bridge Fund to finance the unfunded directive.
• Surety Bridge Fund reviews the situation, determines if it is an unfunded directive, and confirms both parties’ contractual obligations
• Surety Bridge Fund provides funding to the project specifically for the unfunded directive(s), under a structure to be developed.
• The owner makes a change to the contract, acknowledges the assignment and subrogation of the directive’s liability, with consent of surety.
• The contractor performs the work under protest and accounts for the Surety Bridge Funds as a contingent liability.
• The contract and owner work to resolve the dispute with the assistance of the construction experts at Surety Bridge Fund.
• Surety Bridge Fund issues its opinion of the responsibility or allocates responsibility to both owner and contractor for the directive.
• Upon resolution the Surety Bridge Funds loan is repaid.
• If the public entity is obligated for the repayment, Surety Bridge Fund works with the entity to assist in securing necessary funds.
• If the contractor is obligated for the repayment, Surety Bridge Fund works with the contractor and/or the surety for repayment.

Surety Bridge Fund is successful because they provide a neutral position of responsibility. If the matter is not resolved, the matter is then taken through the legal process. With the Surety Bridge Fund, the contractor is not burdened with the hung receivable or under billing and remains in a financial position to advance its case for recovery. The financing burden is carried by Surety Bridge Funds who, regardless of ultimate liability, have a fully secured loan.

Surety Bridge Fund represents an ongoing relationship with major surety companies, which service public and private entities. The relationship between the surety companies and the public and private entities has the potential for a great number of loans. Surety Bridge Fund is seeking a financial institution that is capable of assuming the lenders role. These financial institutions can manage large pools and provide assistance to public agencies when needed.