Although some tax credits have gone away, green construction is not going anywhere. In fact, solar energy projects have continued to grow around the word as the technology improves and the price of panels continues to decrease. China and the U.S. lead the way and are project to have the most solar panels installations by 2024. It stands to reason with more solar construction projects planned, the requirements to provide performance bonds and payments bonds on those projects will continue to increase as well. Unfortunately, not every surety bond company is comfortable with bonding solar projects. The technology is still relatively new, and the long-term uncertainty makes some uncomfortable. Here are some tips to help solar contractors needing to bond solar work.
Review the Warranty
Often this is the biggest hang-up I see in providing surety bonds to solar contractors. Many obligees are nervous about the long-term durability of these panels. As such, they incorporate long term warranties into the project contract. I have seen these warranties be if twenty years with ten years being common. Surety bond companies will not bond these long-term warranties. Surety bonds are not meant to be long term maintenance tools. Under normal circumstances, two years is a common warranty period. Fortunately, most manufacturers of solar panels are familiar with these concerns and will provide a long-term manufacturer’s warranty. This warranty covers defects in the panels themselves but the labor to come back and replace them would not be covered after the two-year bond period. This is a win for contractors and their surety bond companies as it would be difficult to price the risk of labor for long periods in the future.
Efficiency Guarantees
In addition to warranties, we also see many owners who require efficiency guarantees in their contracts. Although it sounds similar, efficiency guarantees are different than warranties. Where warranties cover the defects of the equipment and workmanship, efficiency guarantees a certain amount of power output over time. Surety bond companies want know part of guaranteeing power output. This is largely out of the control of their contractor and the intention of a contract surety bond. There are some insurance carriers who have developed products specifically for these guarantees, but a better practice is to exclude this from the contractor’s contract and pass them back to the manufacturer if possible.
Make Sure the Project is Properly Funded
We often see solar projects where the funding is not complete. These projects sometimes have private investments, are waiting on government rebates or financing is tied to some level of performance. We have also seen instances where the contractor has some ownership in the development. Surety bond companies are usually not willing to write performance bonds for these projects as they are very risky for the contractor. Usually, surety bond companies are not excited about solar contractors who want to be developers either. For the most part, surety bond companies want to see contractor use their assets for construction and to get paid for their work as the construction phase progresses. As such, contractors should verify that the project has been fully financed and that the proceeds are set aside before starting construction.
Design Build
Many solar projects are design build projects. If that’s the case, there is an added element of risk for you and your surety bond company. You can read more about bonding design build projects here but at the very least your surety bond company will want to make sure that you have the proper professional liability insurance in place. They will also want to know who is designing the project and if they have previous solar experience. Finally, most design build projects carry a surcharge on your bond premium for the extra risk and you will want to make sure you incorporate that into your pricing. You can read all about how contract surety bonds are priced here.
Bond Claims and Indemnity
The process for bond claims on a solar project are the same as other performance bond claims. You can read more about that here. The surety bond company will investigate to make sure that a valid claim exists. If it does and they are required to step in, they will seek reimbursement from the Principal and indemnitors under the General Indemnity Agreement. Contractors can read more about indemnity here.
Select the Right Bond Company and Broker
I have provided surety bonds on many solar projects and find that they are very simple. However, many surety bond underwriters have not worked on these types of projects and are scared off by the thought. Many solar projects are very simple, however. Usually, they start like many other projects. There is site and utility work to start followed by setting the panels. Most of the connections are often not any more difficult than plugging in a television set. Having this understanding goes a long way towards getting the surety bond approved.
If you are a solar contractor who needs a surety bond and someone with the expertise to help you, contact MG Surety today. You can also visit our Frequently Asked Questions Page about Performance Bonds here. We want to be your surety bond broker for life!