As you’re likely aware, some project owners require a contractor to acquire bonding to financially insure the construction company’s agreed-upon performance. One type of performance bond that’s been rising in prominence over the past several years is the expedited dispute resolution (EDR) bond. True to its name, the EDR bond accelerates the dispute resolution process if a performance default claim develops.
Most performance bonds don’t dictate a time frame or action plan for dispute resolution. This means bond claims can take weeks, if not months or even years, to resolve. The extended delay can cause work stoppage, resulting in projects not being delivered on time.
The EDR bond’s primary goal is to promptly resolve any dispute between the parties to the bond with a streamlined investigation and adjudication process. It defines the time frame allotted to the surety to investigate each disagreement, typically less than 30 to 45 days. This helps keep projects as close to on schedule as possible.
EDR bonds tend to be ideal for large, complex projects where project timing is sensitive. They may also be a good fit when an owner is asking for a letter of credit. It’s worth noting that EDR bonds aren’t well-suited for traditional design-bid-build projects, where the design risk falls under a separate contract from the construction contract.
The EDR bond involves three parties:
- The surety company that underwrites the bond,
- The obligee that has requested the bond (project owner), and
- The principal that buys the bond (contractor).
Sometimes the obligee is a general contractor and the principal a subcontractor. When a claim dispute arises, a neutral adjudicator with construction expertise is brought in to swiftly resolve it.
The surety’s obligation to make any payments or otherwise complete a defaulted construction contract cannot be invoked on demand by the obligee, as would happen under a letter of credit. However, the obligee’s right to payment or contract completion will be promptly adjudicated so the project isn’t excessively delayed.
The adjudicator determines whether the obligee and principal have complied with their commitments under the bonded contract, and whether the surety is liable to pay or perform the bonded contract. The adjudicator’s decision is binding and obligates the parties to perform while also preserving the parties’ rights to later seek a judicial review.
For example, if the adjudicator determines the surety is liable to pay or otherwise perform, the surety must comply promptly — even if the surety plans to appeal the decision. This ensures an appeal will cause no delay in project completion.
Same but different
EDR bonds aren’t all that dissimilar from other performance or payment bonds. Considered a contingent liability, they won’t appear on your balance sheet. Unlike letters of credit, EDR bonds won’t impact your construction company’s borrowing capacity or tie up existing cash assets.
What they’ll do, along with insuring your performance, is create an accelerated process for resolving performance bond claims as well as other construction disputes. Overall, this bond type is crafted to encourage communication and reduce litigation over performance claims.
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