C. The Construction Contract and Bond C. The Construction Contract and Bond

C. The Construction Contract and Bond

Ordinarily, the engineer prepares the construction contract; however, the drainage code contemplates that the drainage authority’s attorney, the engineer, and the attorney for the petitioners must prepare the contract and bond.⁷⁶²

The contract adopts the plans and specifications as prepared by the engineer.⁷⁶³ The plans and specifications section should provide that the engineer has the right, with the consent of the drainage authority, to modify the plans and specifications as work progresses and as circumstances require and that the contractor is obligated to provide it at the same rate stated in its bid.⁷⁶⁴

The contract should also include special terms that cover the following:

1. The work is subject to the inspection and approval of the engineer;⁷⁶⁵
   
2. Time is of the essence of the contract;⁷⁶⁶ and
   
3. If there is a failure to perform the work according to the terms of the contract within the time given in the original contract or as extended, the contractors shall forfeit and pay the affected counties an amount stated in the contract as liquidated damages.⁷⁶⁷
   

The contract and bond must include all provisions discussed in this chapter of the manual, in addition to the provisions found in Minn. Stat. § 574.26 to 574.32, and the Public Contractors’ Performance and Payment Bond Act.” The act requires the two bonds:

1. the contractor must give a performance bond to the drainage authority for the use and benefit of the drainage authority to complete the contract according to its terms, and conditioned on saving the drainage authority harmless from all costs and charges that may accrue on account of completing the specified work;⁷⁶⁸ and
   
2. the contractor must give a payment bond for the use and benefit of all persons furnishing labor and materials engaged under, or to perform the contract, conditioned for the payment, as they become due, of all just claims for the labor and materials.⁷⁶⁹
   

The penalty of performance bond and the payment bond must not be less than the contract price.⁷⁷⁰ If the contract price increases after the bond is given, the drainage authority may require additional bonds, the penalties of which must not be less than the amount of the increase in the contract price.⁷⁷¹ The work under the contract shall cease if the bonds demanded are not furnished within ten days.⁷⁷²

The Public Contractors’ Performance and Payment Bond Act allows for reasonable attorneys’ fees, costs, and disbursements to be awarded in an action to enforce claims under the act.⁷⁷³

There is no statutory limit on how much time the contractor has to enter into a contract. In addition, if any portion of the work is to be done by the United States or an agency of the United States, a bond or contract is not necessary for that work unless required by laws governing the United States or its agencies.⁷⁷⁴

1. Contract Changes During Construction

If a change increases the cost of the project, the engineer must bear in mind that the damages and costs’ of the project may not exceed the benefits found by the drainage authority.⁷⁷⁵ No change may be made if it will substantially impair the usefulness of any part of the project or system or substantially alter its original character.⁷⁷⁶

No changes to the original contract may be made that will cause any detrimental effects to the public interest under the environmental, land use, and multipurpose water management criteria in section 103E.015, subdivision 1.⁷⁷⁷

As a practical matter, minor changes are made by the engineer without a hearing.

2. Guaranty of Tile Work

If the drainage authority receives a request for a guarantee of tile work from a majority of the persons affected by the part of any project which is made up of drain tile, that part of the construction contract must be let separately.⁷⁷⁸ Such a request must be made before advertising for the letting of the work has begun.⁷⁷⁹ If the tile work is let separately, the contractor must guarantee the tile work installed pursuant to the contract for three years after its completion against any fault or negligence on the part of the contractor.⁷⁸⁰ The invitation to bid must make it clear that such a guarantee is required.⁷⁸¹ The contractor’s performance bond in such case must contain a special provision guaranteeing the tile work.⁷⁸²

It is noteworthy that the statute requires the contractor only to guarantee the work against any fault or negligence on the part of the contractor. What if the material (the tile itself) fails?⁷⁸³ The contractor’s guarantee does not cover that. The drainage authority might have a cause of action against the manufacturer for breach of warranty, express or implied. Such an action could be brought for unreasonable failure of the product, even after three years had expired.

3. Contractor’s Default

If a contractor fails to perform the contract according to specifications, the auditor or secretary should mail a notice of the default to the contractor, to the surety on the performance bond, to the engineer, and to the auditors of all affected counties.⁷⁸⁴ The notice should specify the default and state that, if the default is not promptly cured and the contract completed, the unfinished portion of the contract will be awarded to another contractor.⁷⁸⁵

The surety, on receiving such a notice, can be expected to respond. The surety will first contact the contractor to try to determine whether the contractor can or will perform. Often the problem ends there. If the contractor has become insolvent, bankrupt, or otherwise unable to complete the contract, the surety may hire a contractor of its own to complete the job. The auditors or secretary may grant an extension of time to accommodate the surety without convening the drainage authority.⁷⁸⁶ If the contract is completed by the surety, the balance owing on the contract should be paid to the surety, less damages incurred by the affected counties from the default.⁷⁸⁷

Damages incurred may be a matter of dispute. As always, it is difficult for the drainage authority to show damage. It is the landowners who are damaged, but the landowners do not get a chance to make a claim on the bond. The drainage authority cannot make a claim on behalf of the landowners. The only damages likely to be suffered by the drainage authority may come in the form of extra legal and engineering fees.

If the surety does not undertake to complete the contract or, having undertaken to do so, does not complete it within the specified time or extended time, the auditors of the affected counties or the secretary for a watershed district project may advertise for bids to complete the contract in the manner provided in the original letting.⁷⁸⁸ The drainage authority may recover any increased costs in completing the project from the original contractor’s bonding company.⁷⁸⁹ Such increased costs are not only the administrative costs involved in re-letting (publication, extra engineering, and legal), but also any construction costs in excess of the original contract.⁷⁹⁰

4. Inspection of Drainage Construction and Partial Payments

Part of the job of the project engineer is to inspect the work as it is being completed and to demand that it be done in accordance with the plan, specifications, and contract for construction.⁷⁹¹ The project engineer is to submit a monthly report to the drainage authority showing the work completed since the previous report and all materials furnished under the contract.⁷⁹²

The contractor does not get paid until the engineer certifies a preliminary certificate for “work done and approved or for materials delivered.”⁷⁹³ The engineer’s certificate must show the station numbers covered by the certificate and state the value of the work done and the materials furnished according to the contract.⁷⁹⁴

Each preliminary certificate should show the volume in cubic yards of the excavation completed and must show that a loss will not occur if partial payment is made.⁷⁹⁵ For joint county drainage systems, the certificate must also show the total value to be paid by each county in the proportion fixed by the drainage authority order.⁷⁹⁶ A duplicate of the engineer's preliminary certificate is delivered to the auditor of each affected county or to the secretary of a watershed district.⁷⁹⁷

The affected counties or watershed district must then pay the contractor (based upon the certificate) 90 percent of the total value of the work done and approved and 90 percent of the total value of the material furnished and delivered.⁷⁹⁸ The contractor is not to cause materials to be delivered until they are needed and until delivery is authorized by the engineer.⁷⁹⁹

The contractor may, on a single contract exceeding $50,000, file a verified petition with the auditor requesting an order be made to pay 40 percent of the retained value of work and material if the following statements are true and made in the petition:

1. the contract, exclusive of materials furnished and not installed, is one-half or more complete; and
2. the contractor is not in default.⁸⁰⁰
   

When a verified petition is filed, the auditor or secretary shall set a time and location for a hearing on the petition before the drainage authority and provide at least five days’ notice, by mail, of the hearing to the engineer, the attorney for the petitioners, the surety of the contractor’s bond, and auditors of the affected counties.⁸⁰¹

A sample notice of hearing on petition for partial payment of retained contract amounts is found in Template E .

The drainage authority has the discretion of whether the grant the petition, but may only do so if it finds the following:

1. the facts stated in the petition are correct;
2. the work thus far has been performed in a satisfactory manner; and
3. if a portion of the retainage is released, the interests of the affected counties or watershed district will not be endangered.⁸⁰²
   

A template findings and order granting contractor’s petition for partial payment of retained contract amounts is found in Template F .

5. Extension of Time on Contract

The auditors or secretary may, without convening the drainage authority, extend the time for the performance of a construction contract upon the contractor’s written application.⁸⁰³ Notice of the application for extension must be given to the project engineer, to the attorney for the petitioners, and to the auditors of the affected counties in the case of a joint county drainage project, but the decision is within the discretion of the auditor or watershed district secretary.⁸⁰⁴ The auditor(s) or secretary may grant an extension if sufficient reasons are shown.⁸⁰⁵ The granting of an extension does not necessarily mean that no liquidated damages may be sought.⁸⁰⁶ If the time for completing the contract expired before the extension was granted, there may still be liquidated damages sought and collected.⁸⁰⁷ If the extension expires, liquidated damages may again be sought.⁸⁰⁸

When a project takes more than one season to complete, the contractor may, after the first year’s work is completed and accepted by the engineer, apply for a reduction in the amount of the performance bond in order to reduce the renewal premiums thereon.⁸⁰⁹ The application must be filed with the auditor and state the following:

1. the work that has been certified by the project engineer as completed;
   
2. the value of the certified work;
   
3. the amount of money received by the contractor and the amount retained by the drainage authority;
   
4. the amount unpaid by the contractor for labor or material furnished on the contract; and
   
5. a request for an order to reduce the amount of the contractor’s bond.⁸¹⁰
   

The auditor, upon receiving the application, must set a time and location for a hearing on the application and provide ten days’ notice of the hearing by publication in each affected county and notice by mail given to the engineer, the attorney for the petitioners, and the auditor of each affected county.⁸¹¹ The contractor is responsible for the costs of publishing the hearing notice.⁸¹²

It is within the drainage authority’s discretion whether to reduce the contractor’s bond, but it must only do so after it determines that the contractor is not in default and that a loss will not result from reducing the bond.⁸¹³ If the drainage authority orders the bond to be reduced, the bond amount must still be sufficient to protect the affected counties or watershed district from loss and damage and may not be reduced by more than 35 percent of the amount already paid to the contractor.⁸¹⁴ The reduction does not affect the remaining amount on the bond, does not affect the liability incurred on the bond before the reduction, and does not affect a provision for a three-year guaranty of tile work.⁸¹⁵

FOOTNOTES

⁷⁶² Minn. Stat. § 103E.501, subd. 1 (2015).
⁷⁶³ Minn. Stat. § 103E.501, subd. 3 (2015).
⁷⁶⁴ Minn. Stat. § 103E.501, subd. 4 (2015).
⁷⁶⁵ Minn. Stat. § 103E.501, subd. 3 (2015).
⁷⁶⁶ Minn. Stat. § 103E.501, subd. 3 (2015).
⁷⁶⁷ Minn. Stat. § 103E.501, subd. 3 (2015). The county auditor or watershed district secretary fixes the amount of liquidated damages owed for each day the contract fails to perform. Minn. Stat. § 103E.501, subd. 3 (2015). The function of liquidated damages is to provide the contractor with an incentive to finish the project in a timely manner. Beyond that, liquidated damages are required because it is difficult to prove the amount of damages incurred by the drainage authority when the project is completed late. Liquidated damages are often threatened, but seldom recovered. The problem with liquidated damages is the courts hold uniformly that liquidated damages may not be awarded unless there are some actual damages incurred by the person who has the right to claim liquidated damages. When a project is late in being completed, the persons who experience the loss are the affected landowners. It has been held that landowners have no right to recover from the contractor or from the contractor's performance bond for loss of profits arising from failure to complete a project on time. Grams v. Murphy, 103 Minn. 219, 114 N.W. 753 (Minn. 1908). Apparently, this is still good law since this case has never been overturned.
⁷⁶⁸ Minn. Stat. § 574.26, subd. 2 (2015).
⁷⁶⁹ Minn. Stat. § 574.26, subd. 2 (2015).
⁷⁷⁰ Minn. Stat. § 574.26, subd. 3 (2015).
⁷⁷¹ Minn. Stat. § 574.26, subd. 3 (2015).
⁷⁷² Minn. Stat. § 574.26, subd. 3 (2015).
⁷⁷³ Minn. Stat. § 574.26, subd. 2 (2015).
⁷⁷⁴ Minn. Stat. § 103E.501, subd. 5 (2015).
⁷⁷⁵ Minn. Stat. § 103E.501, subd. 4 (2015).
⁷⁷⁶ Minn. Stat. § 103E.501, subd. 4 (2015).
⁷⁷⁷ Minn. Stat. § 103E.501, subd. 4 (2015).
⁷⁷⁸ Minn. Stat. § 103E.501, subd. 6 (2015).
⁷⁷⁹ Minn. Stat. § 103E.501, subd. 6 (2015).
⁷⁸⁰ Minn. Stat. § 103E.501, subd. 6 (2015).
⁷⁸¹ Minn. Stat. § 103E.501, subd. 6 (2015).
⁷⁸² Minn. Stat. § 103E.501, subd. 2 (2015).
⁷⁸³ See Minn. Stat. § 103E.121 (granting the Director of the Division of Waters of the Department of Natural Resources the authority to investigate the methods used in the manufacture of drain tile, determine the causes of drain tile failure, and conduct research and experimentation to improve the quality of drain tile).
⁷⁸⁴ Minn. Stat. § 103E.551, subd. 1 (2015).
⁷⁸⁵ Minn. Stat. § 103E.551, subd. 1 (2015).
⁷⁸⁶ See Minn. Stat. § 103E.551, subd. 2 (2015).
⁷⁸⁷ Minn. Stat. § 103E.551, subd. 2 (2015).
⁷⁸⁸ Minn. Stat. § 103E.551, subd. 3 (2015).
⁷⁸⁹ Minn. Stat. § 103E.551, subd. 3 (2015).
⁷⁹⁰ Minn. Stat. § 103E.551, subd. 3 (2015).
⁷⁹¹ Minn. Stat. §§ 103E.521 & 103E.531, subd. 1 (2015).
⁷⁹² Minn. Stat. § 103E.531, subd. 1 (2015).
⁷⁹³ Minn. Stat. § 103E.531, subd. 2 (2015).
⁷⁹⁴ Minn. Stat. § 103E.531, subd. 2 (2015).
⁷⁹⁵ Minn. Stat. § 103E.531, subd. 2 (2015).
⁷⁹⁶ Minn. Stat. § 103E.531, subd. 2 (2015).
⁷⁹⁷ Minn. Stat. § 103E.531, subd. 2 (2015).
⁷⁹⁸ Minn. Stat. § 103E.531, subd. 3 (2015).
⁷⁹⁹ Minn. Stat. § 103E.531, subd. 3 (2015).
⁸⁰⁰ Minn. Stat. § 103E.535, subd. 1 (2015).
⁸⁰¹ Minn. Stat. § 103E.535, subd. 2 (2015).
⁸⁰² Minn. Stat. § 103E.535, subd. 3 (2015).
⁸⁰³ Minn. Stat. § 103E.541 (2015).
⁸⁰⁴ Minn. Stat. § 103E.541 (2015).
⁸⁰⁵ Minn. Stat. § 103E.541 (2015).
⁸⁰⁶ Minn. Stat. § 103E.541 (2015).
⁸⁰⁷ Minn. Stat. § 103E.541 (2015).
⁸⁰⁸ Minn. Stat. § 103E.541 (2015).
⁸⁰⁹ Minn. Stat. § 103E.545, subd. 1 (2015).
⁸¹⁰ Minn. Stat. § 103E.545, subd. 1 (2015).
⁸¹¹ Minn. Stat. § 103E.545, subd. 2 (2015).
⁸¹² Minn. Stat. § 103E.545, subd. 2 (2015).
⁸¹³ Minn. Stat. § 103E.545, subd. 3 (2015).
⁸¹⁴ Minn. Stat. § 103E.545, subd. 3 (2015).
⁸¹⁵ Minn. Stat. § 103E.545, subd. 3 (2015).