The bulk of our articles on the Construction Payment Blog focus on construction payment documents (such as preliminary notices), lien and notice requirements (such as deadlines), and keeping lien and bond rights alive to ensure that payments are fairly made throughout the life of a project.
We like to dip our toes into other areas from time to time too, especially when new trends pop up that may affect construction payment. Keeping that in mind, a new surety product called an EDR bond has recently emerged. For a little deeper look to really try to understand this new bonding product, please read on.
Where Did the EDR Bond Come From?
Essentially, an EDR bond is held out as a replacement for performance bonding on large, complex projects. Breaking down the acronym should help give some insight into the point of an EDR bond — an EDR bond is an “Expedited Dispute Resolution” bond. The product was created recently in response to a massive P3 project now underway in Pennsylvania — the Pennsylvania P3 Rapid Bridge Replacement Program (which we wrote about back in September — follow the link to read more).
Under the program, the Pennsylvania Department of Transportation (“PennDOT”) partnered with a private company to replace more than 550 bridges in the state over a 3 year period. After the replacement, the private company will be bound to perform maintenance on the newly replaced bridges for the next 25 years. By using an alternative project delivery method, PennDOT is spending about 20% less than a similar traditional project might cost.
As we’ve mentioned in previous posts, P3 projects can cause a flurry of issues when trying to secure payment. Some states require bonding for P3s under their Little Miller Acts, while other states don’t. But for a project this massive project in Pennsylvania, a different bonding approach needed to be taken. That’s why Travelers created the EDR bond to provide protection on this massive, long term public-private partnership.
Construction Bond Resources from zlien
What Does an EDR Bond Do?
As mentioned above, an EDR Bond serves as an alternative for payment and performance bonding. The EDR Bond both provides protection for the party initiating the project and for the subs and suppliers down-the-chain from a contractor. However, it’s important to remember that whether an EDR Bond could be used in place of more traditional bonding on a public project would depend on a given state’s Little Miller Act. But if traditional bonding works (and it often does), why create an EDR Bond?
The primary benefit of an EDR Bond is spelled out in its name — that is, disputes are put in the fast lane (or “expedited”).
EDR Bonds, unlike traditional bonds, create a very structured and predictable claim schedule, both for the performance aspect and the payment aspect of bond claims. Whether an owner (or public entity) is making a claim on a performance bond or a subcontractor (or supplier) is making a claim on a payment bond, the surety will typically want to investigate any claim made. While the timeframe for making a bond claim is often heavily regulated, the surety’s timeframe for responding to that claim can drag on if the surety takes too long to investigate or if the surety disputes the claim.
When utilizing an EDR Bond instead, the claims process is sped up significantly. According to Construction Executive, a surety providing an EDR Bond will have 15 days to investigate. If the surety wants to dispute the claim, a 45 day mini-trial will take place. Ultimately, as a result of that mini-trial, an arbitrator will make a binding determination (I knew “EDR” sounded like ADR). The decision may be appealed, but in the meantime, the surety will be bound to pay a claim if required by the arbitrator.
Further Reading on EDR Bonds
Who Is an EDR Bond For?
The above is all well and good — but when should an EDR Bond be used?
It should come as no surprise that EDR Bonds aren’t for everyone. Considering they were literally created to service a single, massive P3 project, that should be a good indicator that large P3’s are a good fit. More specifically, EDR Bonds make a lot of sense when stages of a project are integrated, rather than on traditional design-bid-build projects. Construction Executive also identifies power plants, oil and gas pipeline reconstruction, manufacturing facilities, data centers, high-tech projects, more more traditional private projects as good candidates for EDR Bonds, as well.
EDR Bonds Are Brand New
This detail is important: no claims have ever been made against an EDR Bond.
And so, while the above sounds great, and Travelers is a widely respected surety, it’s still unclear whether EDR Bonds would be upheld in court to operate in the way they’re supposed to. That being said, some of the best minds in bonding came together to create this product for a high stakes project, so every precaution was likely taken. Plus, it passed the smell test with Standard & Poor’s as mentioned in this article from the international law firm, Ashurst.
Have a Legal Question about Construction Payment?
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