Construction projects thrive on momentum. Unfortunately, disputes can derail even the most carefully planned schedules. And while traditional performance bonds provide financial security, they often leave the dispute resolution process open-ended.

Expedited dispute resolution (EDR) bonds address this gap. These surety products help contractors and owners avoid prolonged standstills by setting clear timelines for investigation and resolution. They keep jobs moving forward and protect the parties involved.

Prompt resolution

With conventional performance bonds, 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 with a streamlined investigation and adjudication process. It defines an immediate time frame for the surety to investigate each disagreement, which helps keep jobs as close to on schedule as possible.

EDR bonds tend to be ideal for large, complex projects where timing is sensitive. They may also be a good fit when an owner asks for a letter of credit. It’s worth noting that EDR bonds aren’t well-suited for the traditional design-bid-build delivery model, where the design risk falls under a separate contract from the construction agreement.

From a financial perspective, these bonds are generally considered a contingent liability, so they won’t appear on your balance sheet. And unlike letters of credit, EDR bonds won’t impact your construction company’s borrowing capacity or tie up existing cash assets.

Parties involved

The EDR bond involves three parties:

1. The surety company that underwrites the bond,
2. The obligee that requests the bond (project owner), and
3. The principal that buys the bond (contractor).

Sometimes the obligee is a general contractor, and the principal is 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 can’t 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.

Binding decision

The adjudicator determines whether:

• The obligee and principal have fulfilled their obligations under the bonded contract, and
• The surety is liable to pay or perform under the bonded contract.

The adjudicator’s decision is binding and obligates the parties to perform. It also preserves the parties’ rights to later seek a judicial review.

For example, if the adjudicator decides 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 won’t delay project completion.

Financial implications

EDR bonds aren’t a good fit for every project. However, when timing is critical and owners require additional security, these surety products can offer an intriguing alternative to letters of credit or conventional bonds. If you’re interested in giving one a try, we can help you explore the financial implications. And, of course, your surety agent should be able to provide further details.